A certificate of deposit is a type of fixed deposit – probably one of the best-known examples of a fixed deposit. So, while a CD is a fixed deposit, a fixed deposit can be a CD or other, similar financial investment. Making things a bit more confusing is the fact that the term "fixed deposit" is used differently in different countries.
Understanding a certificate of deposit and fixed deposit difference will help you decide when it's a good idea to make this choice of investment to optimize your personal finances.
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Read More: Certificate of Deposit Pros & Cons
What Is a Fixed Deposit?
The term "fixed deposit" is commonly used in India to describe a financial investment that provides a modest interest rate if you keep the money in the account for a fixed period of time. In the U.S., these financial instruments are referred to as a "time deposit." So, a certificate of deposit vs. fixed deposit difference is that a CD is a type of time deposit.
Some U.S. financial institutions also use the term "fixed deposit" and may refer to certificates of deposits as fixed deposits. The name of this financial investment product comes from the fact that the interest rates and time periods are fixed.
Because you can't withdraw your money from your deposit account without penalty, the bank can lend your money and profit from it. This is why institutions that offer fixed deposits pay a higher interest rate than on savings and checking accounts. With savings and checking accounts, you can continue to withdraw your money and use most of the money in your account as you please, making it unavailable to the bank to lend.
Read More: Three Types of Time Deposits
What Is a Certificate of Deposit?
A certificate of deposit is an example of a fixed, or time, deposit. You put $X of dollars into the CD for X months and earn X percent interest. Everything is fixed. You can purchase CDs that mature in as little as three months or 10 years. The longer you keep your money in the CD, the higher your interest rate.
Different banks offer different levels of access to the money in your CD with varying penalty levels. Make sure you understand all of the terms for a CD before you purchase one. Specifically, ask what happens if you take any or all of the money out of the CD before its maturity date. If you think you might need to access your money on short notice, look into a money market account. Money market accounts offer lower interest rates, but you can use the money in them without penalty.
When Should You Get One?
Fixed deposits like CDs are often very low interest investing options. You can do better by investing your money into your work 401(k), especially if your company matches your contribution. You'll probably also do better investing in the market (using a professional advisor who puts you in a mutual fund) because investments like CDs often offer less than a 2 percent return on your investment.
One reason to invest in a CD is if you want a safe (guaranteed) return on your investment. If you put your money in the stock market, you can lose money if your securities lose value or they stagnate and you have to pay fees, commissions and taxes. CDs are also federally insured through the Federal Deposit Insurance Corporation at most banks.
Another reason to invest in a CD is if you want to be able to access your money sooner. For example, if you know you're going to have $10,000 worth of extra money sitting in your checking or savings account for months or more than a year, you might as well put it into a CD and earn some extra interest.
If you think you might need the money soon, you can open a 90-day CD. If you think you can wait longer, you could open a six-month CD or a money market account.