What Is a CD?

Video Transcript

"Hi, there. I'm Cathy Pareto, the founder of Cathy Pareto and Associates, certified financial planner, here in Miami, Florida. In this clip, we're going to be talking about what is a CD? Now, a CD here is not referring to the music business. I'm referring to something called a certificate of deposit, which is a fixed income instrument that you can typically buy at a bank -- a local bank or a national bank. And how these work is basically you're giving the bank X amount of money of your dollars, and they're going to hold onto that money for a certain period of time. Now, the longer the period of time, the higher the interest rate you can command. The way that it works is you give the bank your money, and you don't get paid the interest until you get the money back after the CD matures. Let's talk about matures. What do I mean by that? A CD has different time periods where the money is locked up, essentially, and it's at the bank instead of in your pocket. It could be a three-month CD, six-month CD, five-year CD. The longer the bank has that money, the more interest you'll get paid. You get your money back, plus interest. Now, let's say that you need that money. If you have some kind of emergency and the bank still has it, well, just be aware that even though a CD is risk-free and you're going to get it back, if you have to break the contract, so to speak, and you need the money before the period is over, then you're going to pay a penalty on that and you're not going to be able to accumulate the interest that you thought you would. So if you think you're going to need the money, don't put it in a CD, or at least buy a short-term CD with the bank. And that's a little bit on CDs, and this has been Cathy Pareto in Miami, Florida."