Certificates of Deposit (CDs) aren’t just the music you used to play on road trips. They’re also a useful addition to your financial toolkit. A CD is a savings device that locks up your money for a certain amount of time, called a term. That term could be anywhere between a few months and a few years, and you can’t access your money during that time without paying a hefty penalty.
In return for saying goodbye to your cash for now, CDs offer competitive interest rates—some of the highest available for savings accounts of any kind. When the CD matures (the term ends), you can take all your money back or renew for another term.
You don’t want to store your emergency savings in a CD, since you want to be able to access that part of your savings quickly if necessary. But say you’ve started saving to purchase a house and think you might be able to save up the down payment in four or five years. You could put the money you have saved so far in a three-year CD so it can grow as quickly as possible due to interest, without risking that you’ll dip into that fund to pay for a spontaneous vacation. At the end of the term, you can decide if you’re ready to use that money, move it somewhere else, or you want to tuck it away again for another year or two.