What is the primary purpose of a certificate of deposit (CD)?

A certificate of deposit (CD) primarily serves as a savings vehicle that offers a higher interest rate compared to standard savings accounts. This higher rate is due to the fact that funds deposited in a CD are held for a fixed term, meaning the bank can use that money for longer-term investments, allowing them to reward depositors with better interest rates. This setup encourages individuals to save by committing their funds for a specified period, usually ranging from a few months to several years.

While CDs do require the funds to be locked in for a set time, the trade-off is the potential for greater returns on interest compared to more liquid savings accounts. This makes them an attractive option for those looking to grow their savings without the volatility associated with investments in stocks or other securities. In contrast, while liquidity and spending flexibility are valuable in other financial instruments, they are not the primary features of a CD.