A Certificate of Deposit (CD) is a financial instrument for those looking for stable investments. A federally insured option, a CD is a stellar, low-risk addition to one’s portfolio. It acts as a savings account, where one invests money for a short period and earns compound interest on the principal amount during this duration. Most CDs typically have a low minimum opening, making them a more accessible investment tool for many.

Things to know before investing in a 12-month CD
Understanding the basics of CD investing could help one navigate this territory more effectively.

1. CD terminology

• Annual Percentage Yield (APY) – This aspect of a CD governs how much one will earn. It refers to the compounded interest rate for the year. To ensure a higher earning potential, it’s best to look for deposits with a higher APY.
• Term length – It refers to the amount of time the money needs to be left in the account to grow at the designated APY. For instance, with a 12-month CD, one’s money will be locked into the account for an entire year.
• Principal balance – The initial deposit in the CD is termed the principal amount. Most CDs have a minimum balance requirement that one must meet to earn the desired APY.
• Renewal – CDs can automatically renew or roll over if money is not withdrawn within the stipulated time, allowing continuous earnings.
• Early withdrawal penalty – Most CDs are locked in for the term length. This means that the investor cannot access these funds until the term is over. To enforce this, banks and other financial institutions generally impose an early withdrawal fee or penalty if the money is touched before maturity.
• Fixed vs. variable rates – CDs generally have a fixed APY, which acts as protection if rates fall. This is called a fixed-rate CD. Some lending institutions also offer deposits at variable rates, which allows investors to take advantage of any positive fluctuations in the future. But this also increases the chances of risk if rates start to fall.

2. Types of CDs

• Traditional CD – The most common CD on the market, traditional CDs require a one-time deposit (meeting the minimum requirements) that stays with the bank for the specified term length and earns interest at the set APY. Investors can withdraw their sum at the end of this period or roll it over into a new one. Withdrawals are typically met with stern penalties.
• Bump-up CD – This type can be extremely beneficial when interest rates are rising. Bump-up CDs allow investors to let their bank know that they want a higher interest rate for the rest of the term. Generally, only one bump-up is allowed per term period. The downside to these deposits is that they tend to have lower APYs than traditional CDs.
• Step-up CD – Unlike bump-up CDs, investors do not need to communicate with their bank to issue them a higher interest rate. Here, the rate goes up automatically by a predetermined amount at set intervals.
• Liquid CD – With liquid CDs, i nvestors can withdraw money from their principal amount without any penalty risk. They have an APY higher than most savings accounts but lower than traditional CDs. It is also important to note that most banks require that the money stay in the account for at least seven days before withdrawals are allowed.
• Callable  CD –  This type offers the lure of higher APYs but comes with a major risk. The issuer can “call back” the CD before it matures. When this happens, the financial institution returns the principal amount and any interest earned up to that point. Here, the investor needs to look for new CDs or other opportunities to continue earning.
• Jumbo CD – As the name suggests, these CDs require larger deposits, generally around $100,000. These may or may not pay more than a conventional CD.
• Add-on CD – Investors are only allowed a one-time deposit with conventional CDs. Add-on CDs offer the added benefit of repeated investments to grow the principal amount and improve one’s savings over time.

3. Juggling multiple CDs
People often use CDs as their primary means of investment to ensure a low-risk portfolio. This may lead them to invest in multiple CDs. Many opt for a strategy called CD laddering to get better rates and improve liquidity. To build this ladder, one needs to invest in CDs with staggered term lengths so they mature at different times. This ensures that one always has access to some of their funds and helps investors find and take advantage of high-yield CDs.

4. When to choose a CD over a savings account
CDs are designed to be low-risk investment options. They may be a better option than savings accounts in a few conditions.

– One has a sizable emergency fund or savings in another more liquid account.
– One is saving for a specific, short-term goal.
– The interest rate offered is higher than that of a savings account.
– One can comfortably afford the minimum deposit requirement.

12-month CDs with the best yields
Some FDIC-insured banks or NCUA-insured credit unions are currently offering the best 12-month CD rates.

• NexBank –  A 5.35% APY is offered on a minimum deposit of $10,000 and a 6-month interest is charged as an early withdrawal penalty.
• TotalBank –  It offers 5.35% APY on a minimum deposit of $25,000 and charges 3 months of interest as an early withdrawal penalty.
• Prime Alliance Bank –  It offers 5.30% APY, with a minimum deposit of $500; 1 month of interest is charged as an early withdrawal penalty.
• USAlliance Financial – It offers  5.30% APY, with a minimum deposit requirement of $500; 6 months of interest is charged as an early withdrawal penalty.
• Colorado Federal Savings Bank –  It offers 5.30% APY and a minimum deposit requirement of $5000; 3 months of interest is charged as an early withdrawal penalty.