Eli5 how do investment cds work
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broken waaaaaaaay down, you’re giving the government a loan for a set amount of time, and they pay you back with interest.
its an federal investment saving fund where you put in a certain amount of money, say 1,000$ , and have to leave it for a specified duration, say 5 years, and then you will get back the money with interest. this interest is higher than say a bank, but you cannot access the money during that time without incurring penalties
They’re kind of like a savings account, but set amounts of money for set amounts of time. So instead of having an account you can move money into and out of whenever you want, a CD would be a set amount of money (eg. $1000) and set amount of time (eg. 1 year). In return for the banks known stability of the deposit, they typically pay a higher interest rate.
It’s like a savings account with return interest rates that increase the longer you hold your money there. Holding for 3 months? Lower rate. Holding for 2 years? Higher rate.
You can also picture it like a guaranteed decent-performing stock. If you put $5,000 into the stock market, you could lose it all or make a bunch more. If you put $5,000 in a certificate of deposit (CD), you know what rate you are getting (although it can go up or down depending on other world factors) and are guaranteed to make some money.
Lots of people like to build their CDs in “ladders”. The idea being that you have multiple CDs maturing (when the term ends and you get fully payed out with no penalty) in staggered time intervals (3 months, 6 months, 1 year) so that when one finishes, you have free money to use or reinvest into another CD that will further your financial ladder.
Join the r/personalfinance community. They’re a freaking Godsend to my savings account and really opened my eyes to how much “free money” I’m not taking advantage of.
You give the bank your money for a fixed period of time, trading flexible access to your funds for a higher interest rate. If you give them a lot of money for a long time, you’ll get a pretty good rate of return.
The downside is that CD rates are pegged to the Federal Reserve’s interest rate. So if you lock in your rate and then the Fed raises rates, you’re out of luck. But if you get a CD and the Fed then cuts rates, lucky you. Rates keep going up so don’t go getting a CD just yet unless it’s one that won’t mature for a few years.
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