2 Things To Know About Short-Term CDs

A certificate of deposit (CD) is a type of savings product that's federally insured; this means that if the bank or financial institution that holds your CD fails and goes out of business, you'll receive your money back (as long as it adheres to limits set by the Federal Deposit Insurance Corporation). With a CD, you agree to leave your money in the account for a stated period of time or you forfeit some of your interest.

There are short and long-term CDs available. Though exact definitions vary depending on financial institutions, most consider a CD with a term less and 12 months a short-term CD. Short-term CDs can have terms are short as a few days. Here are a couple of things you need to know about short-term CDs.

1. Short-Term CD's Usually Have Higher Interest Rates Than Savings Accounts

One reason that CDs are popular with savers is that they tend to have higher interest rates than the average savings account. This enables you to grow your money more rapidly, even if you only have a limited period to let the funds grow.

Assume you have $20,000 and have 6 months before you need to use the money. If you let it sit in a savings account with an annual percentage yield (APY) of 0.10 percent, this will yield an ending balance of $20,120.30. Your interest earnings are $120.30.

Now, imagine you put the $20,000 in a 6-month CD with an APY of 1.95 percent. Your final balance will be $22,457.08 after 6 months. You'll earn $2,336.78 in interest by opting for the short-term CD.

2. You Should Contact Your Banker When the Term for Your CD Is Over

When the term for your short-term CD is over, it's possible to let the CD roll over on its own. This will happen if you take no action within 10 days of your CD's maturity date. If you go for this alternative, your money will roll over into a CD with the same term. at the current market interest rate.

However, you should avoid letting your CD renew on its own, as this gives you no control over the final term and interest rate. Instead, contact your banker to explore your options and CD rates. You might earn more interest with another short-term CD with a slightly longer term. Or maybe you can receive a special interest rate if you add more funds to the CD. It's common for banks to offer special CD rates to attract more customers.