What Is a Fixed Term Savings Account?
Learn about fixed-term savings accounts (CDs): how they work, their benefits, and how to open one for secure, predictable savings.
A fixed term savings account, commonly known as a Certificate of Deposit (CD) in the United States, offers a structured approach to saving. It provides a predetermined interest rate for money deposited over a specific period. This low-risk savings tool allows individuals to grow their funds predictably, as deposits remain untouched until a set maturity date.
Defining Characteristics
A defining feature of fixed term savings accounts is the fixed term, also known as the maturity period, during which funds are held. This period can range from a few months to several years. The maturity date marks the end of this agreed-upon period, at which point the principal and earned interest become accessible.
Another characteristic is the fixed interest rate, which is established at the time the account is opened and remains constant throughout the entire term. This stability ensures that the interest earned does not change, providing a clear understanding of the account’s growth potential. Unlike variable rate accounts, market rate shifts do not impact the interest payout.
Early withdrawal penalties are a significant aspect of these accounts. Withdrawing funds before the maturity date typically results in a penalty, often a forfeiture of a portion of the interest earned. If the accrued interest is less than the penalty amount, a portion of the original principal might be impacted.
Fixed term savings accounts usually require a minimum initial deposit. This minimum can vary widely among financial institutions. This initial deposit locks in the agreed-upon interest rate for the chosen term.
Account Operations
When opening a fixed term savings account, a lump sum is deposited at the start of the term. Generally, additional deposits are not permitted once the account is funded. Some accounts might offer a brief “deposit window” after opening, allowing for multiple initial contributions within a limited timeframe.
Interest on these accounts is typically calculated daily, allowing for continuous growth. The frequency at which interest is credited to the account can vary, applied monthly, quarterly, annually, or entirely at the maturity date. This compounding of interest means that earnings can generate their own interest, contributing to the overall growth of savings.
Upon reaching the maturity date, account holders have several options for their funds. They can withdraw the principal and all accrued interest. Alternatively, they can reinvest the funds into a new fixed term account, potentially with a different term length or interest rate.
Many financial institutions provide a grace period following maturity, typically lasting between seven and ten days. This short window allows the account holder to decide on the next step without incurring penalties. If no action is taken during this grace period, the bank may automatically renew the CD for a new term, often of the same length as the original, but at the prevailing interest rates.
Steps to Open an Account
Opening a fixed term savings account begins with thorough research and comparison of offerings from various banks and credit unions. It is advisable to evaluate different interest rates, term lengths, and minimum deposit requirements to find an account that aligns with individual financial goals. Understanding the early withdrawal penalties for each specific product is also an important part of this comparison.
Once a suitable account is identified, the application process typically requires specific personal information and documentation. This generally includes a valid government-issued identification, such as a driver’s license or passport, to verify identity. A Social Security Number or Taxpayer Identification Number is also commonly required for tax reporting purposes.
Proof of address, such as a recent utility bill or bank statement, is usually necessary to confirm residency. Additionally, contact information like a phone number and email address will be requested. Finally, the initial deposit funds must be ready to meet the account’s minimum requirement, which can be transferred from an existing bank account or provided through other acceptable methods. The application can often be completed conveniently online or in person at a branch, followed by confirmation of account details upon successful opening.