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A certificate of deposit (CD) is a deposit account (similar to a savings account) offered by banks and other financial institutions. It offers guaranteed earnings over time. But exactly what is a jumbo CD?
Quite simply, a jumbo CD is a CD opened with at least a $100,000 deposit. The term "jumbo" is used in finance to describe larger-sized products, like a very large mortgage loan, for example.
Even for people with sizable nest eggs, $100,000 (or more) is a significant chunk of change. Here's a look at the pros and cons of a jumbo CD and what to consider when opening one.
Jumbo CDs work pretty much the same way as regular CDs. When you deposit money into a certificate of deposit, you earn an annual percentage yield (APY) that's typically higher than you'd get with other deposit accounts. But if you pull out your money before the maturity date, you'll face an early withdrawal penalty.
The big difference is that with a jumbo CD, you're usually depositing $100,000 or more. You can open a regular CD with as little as $500, though the minimum deposit amounts vary by financial institution.
Any investment has pros and cons. Here are some reasons you may want to invest in a jumbo CD:
Here are some potential drawbacks to consider before you invest in a jumbo CD.
CDs are one of the most solid financial commitments in banking. But remember that the penalties for even modest withdrawals are steep. Once you park your money into a CD, it needs to stay there. If you need money for daily expenses, a checking account is a better choice. If you want to save money and earn interest but you don't want to lock up your money for an extended period, consider a high-yield savings account.
If you've decided you want to open a jumbo CD, the next step is to figure out which bank is right for you.
Start by shopping around to find the best CD rates. Online banks tend to offer higher rates since they don't have the overhead costs of a brick-and-mortar-bank. Although they don't necessarily have a separate jumbo CD category, their higher rates in general help make up for this.
Next, you'll want to nail down the term. You need to strike a balance between the return you'll be getting and the length of time you can go without access to the money.
Once you've found the right jumbo CD for you, sit back and wait for your investment to mature.
Here are some of the other questions we've answered:
With a jumbo CD, you can lock in a guaranteed return on a large amount of money for an extended period of time. For people who are worried about stock market volatility, a jumbo CD is a safer way to invest money, although the stock market offers much greater potential returns.
The amount you earn will depend on market interest rates and the CD's term. If you invested $100,000 in a 12-month CD with a 5% APY, you'd have $105,000 at the end of one year. If you invested $100,000 in a 5-year CD with a 5% APY, you'd have $127,628 when the CD matures -- your original $100,000, plus $27,628 in interest earnings.
A jumbo CD could be worth it if you have a solid emergency fund and a large amount of cash that you can afford to lock away for several months or years. However, because CD interest rates are low compared to stock market returns and might not keep up with inflation, you'll also want to have money in investments like stocks and mutual funds before you put money in a jumbo CD.
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