CD Smarts. How CDs Can Help You Meet Your Financial Goals
Over time, Certificates of Deposit (CDs) have provided a safe and secure way to build savings. However, in today's current rising interest rate environment, they've become even more attractive, allowing savers to lock in higher rates of interest over fixed period of times – and get the assurance of deposit protection. But before you invest in a CD, there are some questions you need to answer.
What is a CD?
Before you invest in a CD, it's important to know what it is. A CD is a savings vehicle that offers a fixed rate of interest over a fixed period of time. Unlike savings accounts that allow you to withdraw money as you choose, CDs typically provide higher rates of return when you deposit money for a specific term – often from 3 months to 5 years. In general, the longer the term of the CD, the higher the interest rate you will receive.
What are the reasons you need to save and when will you need the money?
The decision on whether to invest in a CD depends on the reason you need to save and when you need your funds. For example, if you are saving for a down payment on a home, and you plan to buy the home in a few months, a CD wouldn't make sense. However, if you plan to buy the home in a year, a CD may be a great choice. In general, CDs don't make sense if you think you'll need to access the money before the term expires.
What is the interest rate?
Interest rates vary per bank and CD term. When investing in CDs, you need to think about what may happen with rates. If rates are rising (as they currently are), you may want to invest in a shorter-term CD because you may get a higher return later. Similarly, if rates are falling, you may want to invest in a longer-term CD to lock in higher rates. CD rates vary by bank so you'll want to shop around.
What are the fees?
Most banks do not charge fees to open CDs. Most charge pre-payment penalties, which means if you need to access the money before the term of the CD expires, you will have to pay a fee. The amount of that fee will vary by bank.
When does interest on your money compound?
CDs offer another advantage to help borrowers – compounding interest. Compounding means that interest earned is added to the balance in your CD. CDs may be compounded either daily or monthly.
How can you take advantage of the higher rates CDs offer without sacrificing liquidity?
One strategy savvy CD investors use is called laddering. Laddering involves opening multiple certificates of deposit (CDs) with different maturity dates. Then when a CD matures, you have the option to take the money or invest in another CD.
In short, investing in CDs can be a smart way to reach your savings goals.
See our current CD rates here.