These differ from short-term savings accounts due to lack of liquidity and greater returns (see "Part I: Short-term Savings for more information). Long-term accounts include those that require you to keep funds in an account for a minimum term, with the risk of penalties and/or lost accrued interest for early withdrawal. Additionally, there are higher minimum amounts to start the accounts, but higher interest rates, or rates that may remain stable through the life of the account.

Although there are many forms of each, basic details about Certificates of Deposit (CDs) and Individual Retirement Accounts (IRAs) can be found here and in the article "More Long-Term Savings Options".The information can help you when you visit your financial institution to open savings accounts that will meet your long term goals (also see "Savings Goals" for more information).

Certificates of Deposit (CDs)

A CD can be purchased from a financial institution in a range of amounts usually starting at a minimum $500 for terms ranging from one month to 5 years. At about $100,000 or more, certificates are considered Jumbo CDs, and will likely provide the greatest interest rate and return. As a rule of thumb, the greater the dollar amount and term of the CD, the greater the interest rate.

CDs have lower liquidity that all short-term savings accounts. During the certificate term, you cannot deposit or withdraw any funds from the original amount. If you do withdraw or close the certificate early, there may be penalties, and sometime in fees and lost interest that can deduct from the original CD amount (though this varies by financial institution). In the end, you can close or withdraw from a CD early, but expect a penalty that may not be worth dipping into future financial security. Since you cannot deposit additional funds into a CD, you may not be able to maximize the return on an interest "locked in" (your rate will not fluctuate before the CD matures) over the certificate term.

Since you have locked in a specific interest rate over the term of the CD, should higher interest rates be offered by your financial institution, you may not be able to take advantage of the potentially higher returns. Of course, once the CD reaches maturity (i.e.: you are able to close, rollover, or open a new CD), you can open CDs with better terms and interest rates---if they are available at that time.

One way to counteract the changes to interest rates offered by financial institutions is through a process of "laddering". Instead of investing in one large CD, you can purchase several at different maturity dates (e.g.: one CD for a 6 month term, another at 12 months, one at 2 years and one at 5 years). Since the longer terms offer higher interest rates, you can least invest some of your funds into longer-term CDs, but still have some available for higher promotional CD interest rates, or so you have some liquidity in your long-term savings.

What about retirement? See "Part III: More Long-Term Savings Options" to get more information types of IRAs and your options with retirement funds.


References

Moneywise.Help Your Savings Grow

Consumer-Action.com.Saving to Build Wealth