Understanding Certificates of Deposit (CDs): A Guide for Single Moms

As a single mom, learning banking terms such as Certificates of Deposit (CD’s) and managing finances can be challenging. You want to grow your money, you want financial independence, but not sure how or what options are available. When I was a single mom, I didn’t know what a CD was until I worked at a local bank. CDs are savings accounts that earn you a fixed interest rate over a set period of time. They’re an easy way to earn some extra cash without the risk associated with other investments. In this blog, I’ll discuss what certificates of deposit are, how they work, and the pros and cons of using them.

“Believe that you will succeed, and you will!” -Dale Carnegie

What is a certificate of deposit (CD)?

Certificates of deposit, also known as CDs, are savings accounts that earn interest at a fixed rate over a fixed period of time. This means that once you deposit money into a CD account, you can’t withdraw the funds until the end of the term without facing penalties. CDs usually offer higher interest rates than traditional savings accounts, making them a popular choice for people looking to save for a specific goal or for those who want to earn interest on their savings.

How does a certificate of deposit work?

The process of opening a CD account is simple and easy. First, you need to find a bank or credit union that offers CDs. Next, you’ll select the length of time you want to tie your money up, usually ranging from 1 month to 5 years. Many times banks and credit unions will offer CD specials that are a little higher than their typical rates. The longer the term length you choose, the higher the interest rate you can earn. Once you’ve selected a term and deposited money into the CD, you won’t be able to withdraw the funds (without penalty) until the term ends. I give an example of how a CD works and how to calculate the interest you will receive in this YouTube video.

Pros of using a certificate of deposit:

Guaranteed interest: Unlike other investments, CDs offer a guaranteed interest rate over the term. This means that you’ll know exactly how much interest you’ll earn. To calculate how much you will earn on your cd, check out Bankrate.com

Low risk: CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, making them a low-risk investment.

Easy to open: Most banks and credit unions allow you to open a CD account online or in-person. It’s just like opening any other account at a bank. It’s just a different type of account.

Cons of using a certificate of deposit:

Limited access to funds: Once you’ve deposited money into a CD, you can’t withdraw the funds until the term ends without facing penalties.

Lower interest rates: Although CDs offer higher interest than traditional savings accounts, they typically offer lower interest rates than other investments like stocks or mutual funds. This is depending on the economy and rate of inflation.

Inflation risk: If the rate of inflation is higher than the rate of interest you’re earning on your CD, you could actually be losing money in terms of purchasing power.

One Last Thing…

Certificates of deposit can be a useful tool for single moms looking for a low-risk investment with a guaranteed interest rate. They offer higher interest rates than traditional savings accounts and are insured by the FDIC. However, it’s important to be aware of the limitations of CDs, such as limited access to funds and lower interest rates compared to other investments. By understanding how CDs work and weighing the pros and cons, you can make an informed decision on whether this savings option is right for you based on your family situation and values.