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How To Choose A Certificate of Deposit

How To Choose A Certificate of Deposit

CD’s are among the safest and most predictable ways to grow your savings.

They develop savings discipline by locking your funds for a certain amount of time. But with so many available choices, you might find it difficult to find the right one.


Whether you’re building an emergency fund, saving for a large purchase, or just wanting dependable growth, choosing a CD (Certificate of Deposit) requires aligning your financial goals, assessing features, and deciding how much flexibility is needed. Here are a few fundamentals to start:

Understand How Certificates of Deposit Work

Certificates of Deposit are a kind of savings account where you can save your money and earn from it over time. With a CD, you agree to leave your investment untouched for the duration of a term, which varies in length, generally from 3 months to 4 years. During this term, you earn a fixed interest rate on your money. 


Determine Your Savings Goals

Goal setting is simplest when you understand what the money is for and when it will be needed. A certificate of deposit is best for short-to-medium-term goals such as a down payment or future tuition. CDs do lock your money down until the term expires, so it’s important to have clear plans before committing.


Compare CD Terms and Rates

Your time horizon is the foundation of your CD strategy. Once you know your goal, you can begin to compare options. The length of time your deposit is held is one of the biggest factors determining how much you can earn.

 

Short-Term CDs (3–12 months)

  • Quick access to your funds is one of the greatest advantages.

  • Examples include setting funds aside for a family vacation or a home remodel.

You can also consider “CD laddering” where you divide a deposit among different CDs with various terms. This allows you to access funds periodically while still reaping the benefits of longer-term rates. Check out our certificate of deposit calculator to understand your options more!

Certificate of Deposit Advantages

  • Guaranteed returns: Lock in a fixed rate for the full term.

  • Low risk: During a rising rate environment, you may benefit from keeping your term shorter to capture a higher-future rate.

  • Predictability: CDs help you plan for goals with known timelines.

  • Structure promotes discipline: Funds stay untouched until maturity.

 

Certificate of Deposit Disadvantages

  • Limited liquidity: Early withdrawal penalties make CDs unsuitable for money you may need before the maturity date.

  • Rising rates: During a rising rate environment, you may benefit from keeping your term shorter to capture a higher rate that could be offered in the future.

 

Consider Early Withdrawal Rules

CDs are designed to be fixed-term commitments. Withdrawing funds before the maturity date usually results in penalties which are often equivalent to several months of interest. For example, First Western penalties are as follows:

  • If your account has a maturity of three (3) months, the penalty amount will be equal to thirty (30) days interest.

  • If your account has a maturity of six (6) months to twelve (12) months, the penalty amount will be equal to ninety (90) days interest.

  • If your account has a maturity of fifteen (15) months to forty-eight (48) months, the penalty amount will be equal to one hundred and eighty (180) days interest.

These fees could reduce earnings. There is a 10 day grace period after the maturity date, in which you can decide your next steps. During this grace period, money can be extracted without penalty. In certain circumstances such as the death or incompetence of an owner of this account, the law permits, or in some cases requires, the waiver of the early withdrawal penalty.

If losing that interest would reduce your effective earnings or cause you to dip into your principal, that CD might not be the right choice for you.

 

Evaluate Your Bank Options

When comparing credit unions and banks for certificates of deposit, it's important to consider certain things before deciding how and where to grow your savings.

Some things to consider are:

  • Interest Rates 
    The annual percentage yield (or APY) dictates how much your money will grow over time.

  • Minimum deposit requirements 
    Different institutions require different minimum deposits for Certificates of Deposit. 

  • Term lengths
    CDs keep your money locked down for a set period of time, varying from a few months to a few years. Different institutions offer various options.

  • Safety
    When a bank is FDIC-insured, each depositor is insured to at least $250,000 by the FDIC. 

Certificate of Deposit FAQs

How does a CD differ from a regular savings account?

Certificates of Deposit and standard savings accounts are both tools for building savings, but they operate in very different ways. Understanding these differences can help you decide which option best fits your financial goals.

A CD allows you to lock in a specific amount of money for a set period of time, known as the term. During this term, the funds are generally not accessible, and withdrawing money early may result in interest penalties, these fees could reduce earnings. In most cases, additional deposits cannot be made once the CD is opened. Savings accounts, on the other hand, offer flexibility. You can deposit or withdraw money as needed, making them a better choice for day-to-day savings or emergency funds, although withdrawal limitations may apply.

One advantage of a CD is its fixed interest rate, which remains the same until the maturity date. This provides a predictable return and protects your savings from changes in market rates. Once the CD reaches maturity, the funds become available to you.

At First Western, CDs require a minimum opening deposit of $1,000, while regular savings accounts typically have lower minimum balance requirements.


Are CDs FDIC-insured?

First Western is an FDIC-member bank, meaning each depositor is insured to at least $250,000 by the FDIC. The FDIC is backed by the full faith and credit of the U.S. Government.

 

What is the minimum deposit required to open a CD?

CDs at First Western generally require a minimum deposit of $1,000. 

 

What happens if I withdraw money from a CD early?

Early withdrawal can result in a penalty if the account is accessed before the maturity date, so it’s best to deposit what you expect to leave invested for the entire term.


First Western’s penalties for early withdrawal are 1 month interest on 30-days interest on 3-month CD accounts, 90-days interest on 6-12-month certificate of deposit accounts, and 180-days interest on 15-48 month CDs. These fees could reduce earnings. Once your term is met, First Western offers a 10 day grace period, in which you can withdraw the funds penalty-free and decide whether or not to renew all or part of the funds for a new term of your selection. If no decision is made by the end of the grace period, then your term automatically renews to the same as the original term. A new interest rate is determined at time of renewal. Maturity notices are sent by mail, 10-15 days prior to the maturity date.