CD you say? WTF it is. WTF it do?
Certificate of Deposit AKA Time account. Money is deposited up front into the account at a fixed interest rate for a specified term. Typically a longer term means a higher interest rate. You want to let that dough ferment for a couple months? We will sprinkle a little cheddar on it. You prefer to plant that seed and let it grow for a couple years? It should produce a better yield.
On the upside a CD usually pays a better interest rate than a savings account. On the down side the money is less accessible. If you take the money out before the term is up you get charged an early withdrawal fee. Typically you can't add money to the CD during the term. As is common in the world of finance there is an exception to the rule.* Some special types of CDs offer limited access to make withdrawals and/or deposits during the term.
I feel like I'm conveying a lot of information in a logical and concise format here which is good and all but I can tell I'm losing some people in the back. Let's get Charlie back in the mix here. He will add some spicy sauce to this otherwise dry dish.
So Chucky boy he is moving on up in the world. His new wheels provide new avenues to opportunity. If there is one thing Charlie knows about opportunity it's how to take advantage of it. Things are going so well he decides he is going to make some big life changes. He's going to drink milk, go back to school and cut back on his rampant drug use. Stay strong Chuck. Be the change you want to see in the world.
Chuck has got his savings account built back up to $5,500. He knows himself. Some irresistible temptation was going to creep up and wipe out the only remaining tangible evidence of the last year of his life. So Charlie goes to the bank and...wait I forgot that Charlie was from the 21st century, what I meant to say was _ So Charlie sends an electronic message to his bank while he is eating cereal in his bunny underpants and he pleads with them "Save me from myself. Can you make it so that I can't withdraw my own money from my savings account?"
After a time frame within the arranged service window specified by bank policy Charlie gets a return message that he will no doubt not read until his next dump. During said dump Chuck reads a message that says some words that he skims over and assumes that the message said something like "If you couldn't withdraw the money in your savings account it wouldn't really be YOUR savings account now would it? Why not try CD? CD is like that thing you said only slightly different for reasons." It was a convincing argument. Charlie electronically transfers $5k money from his savings account into a CD before he wipes.
"Why did you leave the last $500 in the savings account?" you might ask Charlie. To which he would probably say "This bathroom is occupied you lazy eyed pervert!" Charlie felt violated in two ways because most human adults are even more private about their finances than they are about their butts.
So getting back to Charlie's CD he knows he has a set time frame before he needs the money. He has one more year at his local community college to finish out his two year degree. Then he is going to need the money to pay for a more expensive and more prestigious school in another state. Charlie knows that it's expensive but they teach that one thing that he erroneously imagines will be interesting to him for the rest of his life.
Chucky boy he goes back to school. He drinks some milk. He finishes his two year degree. He turned down some hard drugs at that party that one time. Charlie's CD matures. At some point during the grace period Charlie sends his bank an electronic message requesting that they put the money into his savings account. He immediately hops on a plane to Colorado. Enrolls in classes at the University of Denver. He's technically not doing illegal drugs anymore. Way to go Chuck. Charlie gets a big thumbs up and finger gun from the Fonz and high fives Mr T.
Remember kids if you ever get stuck in a rough spot and absolutely had to get to the funds in your CD early consider taking a loan against it instead of withdrawing the funds in order to avoid the early withdrawal fee. You can figure out if this is a smart move for your particular situation through the power of math.
*The only thing I can say in regards to financial instruments in purely absolute terms is that there is always a caveat.
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