How CDs Work
A certificate of deposit is a deal: you give the bank your money for a fixed term—3 months, 1 year, 5 years—and they pay a fixed interest rate. Rates are typically higher than savings accounts because the bank knows it can use your money for the full term.
When the CD matures, you get your principal plus interest. Walk away early and you'll pay a penalty, usually several months of interest.
APY vs. APR
Banks advertise APY (Annual Percentage Yield), which includes compounding. A 5.00% APR compounded daily gives about 5.13% APY. When comparing CDs, always compare APY. That's the real annual return.
APY = (1 + APR/n)^n − 1
where n = compounding periods per year
CD Laddering Strategy
Instead of putting $50,000 in one 5-year CD, split it: $10,000 each in 1-year, 2-year, 3-year, 4-year, and 5-year CDs. When the 1-year matures, reinvest it in a new 5-year CD. After 5 years, you have a CD maturing every year at the higher 5-year rate, but with annual access to a portion of your money.
This balances higher long-term rates against short-term liquidity needs. It also hedges against rate changes—if rates rise, your maturing CDs capture the new higher rate.
Typical CD Rates by Term
| Term | Typical APY Range | Best For |
|---|---|---|
| 3 months | 3.5-4.5% | Short-term parking |
| 6 months | 4.0-5.0% | Near-term goals |
| 1 year | 4.0-5.2% | Primary savings |
| 2 years | 3.8-4.8% | Medium-term |
| 3 years | 3.5-4.5% | Medium-term |
| 5 years | 3.5-4.5% | Long-term lock-in |
Rates fluctuate with the federal funds rate. During high-rate periods, longer terms may dip below shorter terms (inverted yield curve). Right now, shorter CDs often pay more than longer ones.
CDs vs. Other Savings Options
High-yield savings accounts pay similar rates without locking up your money. So why CDs? Rate lock. If you expect rates to drop, a 5-year CD at 4.5% holds that rate even if savings accounts fall to 2%. If rates are rising, stick with short-term CDs or savings accounts.