Certificates of deposit (CDs): the predictable cousin

A certificate of deposit is a deal with a bank: you give them money and agree not to touch it for a set period — three months, one year, five years. In exchange, they guarantee a fixed interest rate. Pull the money out early, and you usually pay a penalty.

Why someone would use one

• You know exactly when you'll need the money — the down payment in 18 months, a planned expense.
• You want a guaranteed rate, not a savings rate that can change.
• You worry rates will fall and want to lock in today's rate.

Why someone would skip them

• High-yield savings rates are sometimes nearly as good without the lock-up.
• Treasury bills (T-bills) sometimes pay similar rates and are exempt from state income tax.
• If interest rates rise after you lock in, you are stuck at the older lower rate.

CD ladders

If you have $10,000, instead of locking it all into one 5-year CD, you put $2,000 each into a 1-year, 2-year, 3-year, 4-year, and 5-year CD. Each year one matures, and you can spend it or roll it into a new 5-year. This balances getting higher long-term rates with always having access to some money soon.