What Is a High-Yield CD?

Certificates of deposit are investment tools that allow you to grow your money with rates that are higher than those found in typical savings accounts. CDs are often tied to guaranteed rates. Certificate terms vary but generally last from a few months up to five or 10 years.

Investing in a high-yield CD can help you achieve a number of financial goals, such as saving for a new car, by reliably growing your savings. See how a high-yield CD allows you to earn more interest on your deposits, and find out if this investment tool is right for your needs.

What Is a High-Yield CD?

A high-yield CD is just like a traditional CD except it offers a higher return on your investment. Rates and requirements vary by financial institution, but you will likely need to commit to longer terms or larger minimum deposit requirements for high-yield CDs.

For example, while a 3-month certificate from Mission Federal Credit Union earns 0.15% APY, a 60-month CD earns 1.93% APY. Certificates at this credit union also earn higher rates on deposits of $10,000 and more. Where a 24-month CD earns a 0.65% APY on a deposit of $9,999 or less, you earn a 0.70% APY on deposits of $10,000 and more.

Chris Costello, CEO and co-founder of Blooom, said banking customers comparing investment options need to be realistic about how much they can put away and for how long. He suggested CDs can be preferable over stocks and other investment options if you can’t invest for very long. “For example, you know you will need to make a $20,000 down payment on a house in 18 months, [so] you could consider an 18-month CD,” Costello said. “Money that you will need to access within the next three years shouldn’t be invested in stocks.”

Related: How Often Do CD Rates Change?

Why Invest in a High-Yield CD?

Certificates can round out your investment portfolio and secure overall returns, according to Ron Araujo, CFO of Mission Fed. “For the most part, consumers investing in CDs are looking for safety of principal and current income,” he said. “Oftentimes, it is only one component of their entire portfolio of investments, and investing in a CD can stabilize the overall return to the consumer without sacrificing too much liquidity.”

You also want to consider your risk tolerance and current income needs, said Araujo. While stock returns vary over time, for the most part they provide higher returns in the long run. “However, depending on your need for current — and steady — income, most investors need to have some funds allocated to CDs,” Araujo said. “Plus, if you are able to give up access to some of your savings or money market funds, CDs typically pay higher yields than those accounts. So it’s really a function of the investor’s entire portfolio of investments balanced against their specific financial situation.”

Benefits of High-Yield CDs

One reason banking customers choose to put money into high-yield CDs over other savings options is that certificates can offer securities similar to traditional savings but with higher yields. Araujo recommended investors ensure their CDs are backed by the NCUA and FDIC. “For the most part, CDs issued by banks and credit unions are insured up to $250,000,” he said. “That means that if the institution goes out of business, your investment is protected.”

Another benefit of investing in CDs is that your returns are predictable. With fixed rates, you can anticipate how your balance will grow over time. Because you also get to choose your CD’s term length, a fixed rate makes certificates reliable tools for growing savings for specific financial goals. If your child is going to college, for example, and you anticipate you’ll need to grow savings to cover tuition costs, you can open certificates that will mature when it’s time for you to make payments.

What to Do Before You Invest in a High-Yield CD

Before investing in high-yield CDs, it’s important you ensure you won’t need access to your funds until your certificate matures. You also want to comparison shop rates. Araujo recommended asking when interest is paid out on your CD. You might be paid out on a regular schedule, such as semi-annually, or all at once upon your CD’s maturity.

You should also check into rollover provisions. “If you don’t specifically notify the institution of what your intentions are when the CD matures, they may roll your funds right back into a new CD with the same maturity,” said Araujo. If you plan to use funds from a maturing certificate, he suggested you start shopping rates a few weeks before it matures in case you can find a better rate.

Certificates are a safe way to invest your money for reliable returns. If you don’t need immediate access to your funds, high-yield CDs can help you maximize savings with little to no risk to your investments.

Keep Reading: 10 Best CD Accounts of 2015

This article originally appeared on GOBankingRates.com: What Is a High-Yield CD?

This article by Laura Woods first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.