A certificate of deposit (CD) is an investment tool offered by banks and savings and loans, that places money on hold for between three months and five years. Sometimes called time deposits, they are attractive because of their low risk, although they typically provide low returns. They tie up money until their maturity, but in return, the CD owner receives a guaranteed interest rate on his/her investment. A jumbo CD is simply this same account but with higher minimum deposit requirements. Read on for more similarities and differences as well as pros and cons.
Investors are attracted to CDs because of their history of stability and the minimal risk associated with purchase. They are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Interest rates for both increase as the investment term lengthens. The interest earned is usually deposited back into the account on a monthly or quarterly basis. Both types of CDs offer stable income until they mature.
Regular CDs have low initial rates. As opposed to the high costs of investing in a jumbo CD, standard CDs can be purchased for as little as $100. Financial advisors sometimes advise younger investors to buy regular CDs because of their accessibility and lower risk. Jumbo CDs require an investor to place a substantial initial investment ($100,000), although some financial institutions may allow buyers to open a Jumbo CD account with a $50,000 investment. Because of the higher initial investment, a jumbo CD will usually earn a higher interest rate than a traditional CD. This means that interest will compound exponentially and increase the rate of return. However, the investor’s money is usually tied up for a longer period of time, with the average minimum of a year.
Differences in rates between regular CDs and jumbo CDs varies by institution. For example, according to our CD rate database (below), as of December 5, 2012, one available standard CD through Ally Bank for one year had no minimum purchase and pays 1.04 annual percentage yield (APY). On the same date, a jumbo CD for five years through Ally Bank for a $100,000 minimum investment pays 1.61 annual percentage yield (APY).
As with any investment, individuals considering a CD, whether regular or jumbo, should do their homework in order to make the most of their money. Different financial institutions offer different rates on CDs. Any investment combines risk with rate of return and the need (or lack thereof) to quickly access funds. Keep in mind that a CD will tie up your money until it matures. If you need to pull it out before that date, you can face early withdrawal penalties that can seriously cut into your money. If you feel this is a risk you are not willing to take, it may be worth your time to research money market accounts, which are more like traditional checking accounts. They allow you to access your money as needed without penalties.