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Certificates of deposit can be a smart place to park some of your cash.
Key points
CDs are a special type of bank account that pays higher interest on your money than you would from a checking or savings account. You can choose your own CD term, so choose wisely based on when you’ll need the money. transfer your earned interest to the CD account, you can take advantage of compound interest.
With inflation skyrocketing, your money is losing value if you keep it parked in your checking account. Fortunately, there are other places to hide it to help protect against inflation. Have you considered a certificate of deposit (CD) account?
A CD is a bank account that will pay you a fixed percentage of interest on your money (higher than what you would get from your savings or checking account) in exchange for keeping it locked up for a set period of time. They can be a good option during periods of high interest rates (like now).
And one great thing about a CD as opposed to say, a brokerage account, is that your money will be protected if you open that CD with one of 4,745 (as of this writing) FDIC-insured banks. This means that if your bank fails (which has been known to happen), the Federal Deposit Insurance Corporation will cover up to $250,000 held in a deposit account.
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Sound good to you? Read on for six tips for finding the right CD account for you and your money.
1. Choose your term
One of the best things about CDs is that you can choose your own term. The term is the length of time you are keeping your money in the account so that it can earn interest. Banks offer CDs for terms ranging from one month to six years (or more). Generally, six months to five years are common terms. When deciding, you’ll want to see what the bank you’re considering offers and also think about your plans for the money. If you’re going to need that money in, say, two years, plan accordingly.
2. See which banks offer the best interest rates
Since you expect to make money on your money when you open a CD, you’ll want to shop around for the best CD rates available. You’ll usually find higher rates offered by online-only banks; Thanks to their lower overhead costs than traditional banks, they tend to pass savings on to account holders in the form of higher interest rates. You may also consider scaling up your CDs to take advantage of a new interest rate from time to time, especially if rates are increasing.
3. Look at the minimum deposit requirements
Some banks do not require a minimum deposit for CD accounts, which will give you flexibility. Others require a certain amount to get started, often a few thousand dollars. The amount you intend to put into the account should be taken into account in choosing the best CD for you.
4. Consider fees and fines
Fees are generally not something you need to worry about when it comes to CDs. But you’ll want to do your research and see what kind of penalties you may face for early withdrawal. Ideally, you’re putting money in a CD that you won’t need until its term is up, but emergencies do happen, and it’s certainly better to withdraw a CD early than go into debt because you need money fast. In most cases, your early withdrawal penalty will be equal to several months of interest earned on the money.
5. Find out how and when interest is paid
In most cases, the interest on a CD account compounds daily, which means you earn more money. Check how interest is paid on the CD account you are considering; many banks will simply add it to the money already in the account, which means you can take advantage of the miracle of compound interest. If you prefer to be paid directly, open a CD with a bank that offers this.
6. See what happens when the term ends
Finally, make sure you understand what happens at the end of your CD’s term. Some banks will automatically transfer your money to a new CD of the same duration, unless you specify otherwise. It’s usually a better idea to make that call yourself, rather than letting the bank decide what happens to your money.
If you’re ready to open a certificate of deposit, make sure you understand the terms, penalties, and interest on your shiny new account. And to stay on top of the latest banking news and information, check out The Ascent’s banking coverage.
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