Having Trouble Saving Money? A CD Could Be the Answer You're Looking For

You tell yourself you're going to be better about saving money. You do your best, but too often, you end up spending pretty much all of it. Sound familiar?

You're definitely not alone. Sometimes, you just need a little extra incentive to save, and a CD could give you just that. They're not right for everyone, though. Below, we'll take a look at their pros and cons so you can decide if a CD is right for you.

How do CDs work?

A certificate of deposit (CD) is a common bank account that promises an above-average interest rate on your funds. Currently, some of the best CD rates are hovering around 5.00%. But the catch is, you have to agree to leave your cash alone for a while.

How long depends on the CD term you choose. Short-term CDs might only lock away your cash for a few weeks or months while long-term CDs could hold your savings for years.

Each month, you earn interest on the funds in your CD. You can either reinvest this in the CD so you earn interest on your interest in the following month or you may be able to request that the bank transfer your interest payments to a bank account in your name.

It is your money, so you're technically free to withdraw your cash at any time. But usually, you'll pay a penalty for taking your cash out before the CD term ends. The penalty varies by bank and may also depend on how early you've made your withdrawal.

The limitations CDs put on your cash could be that extra barrier you need to avoid spending too much on things you don't need. But these accounts are usually only a good idea if you're confident you can leave your money alone for the whole term.

How do you open a CD?

Opening a CD is just like opening any other bank account. You first need to choose the CD you want. The two things that matter most here are the CD term and the APY. Start by thinking about how long you're comfortable locking your money away. Then, look for the best CD rates that fit this term length. You may want to check out the early withdrawal penalties and minimum deposit requirements too.

Then, all you have to do is contact the bank and open the account. You'll need to provide identification and your Social Security number. And you'll need cash on hand to deposit in the CD. You can usually only make one upfront deposit, though some CDs may permit you to add extra cash over time. If you have any questions, contact the bank for details.

What are the alternatives to a CD?

A single CD might not be a great fit for you if you're worried about locking your money away for too long. If you still like the idea of limiting your access to your cash, a CD ladder might work better for you.

This is where you open multiple CDs of different term lengths and deposit an equal amount of cash in each. When the first CD term ends, you can either spend that cash or roll it over into a new long-term CD. This lets you access some of your cash at chosen intervals while taking advantage of the higher interest rates long-term CDs usually offer. But it may require a lot of money to pull off.

A high-yield savings account is a better bet if you want to grow your savings without losing access to your funds. The best accounts are also offering interest rates of around 5.00% right now. That could put hundreds or thousands of dollars in your pocket, depending on your balance. However, these interest rates are variable and can rise or fall over time, while CD interest rates are usually fixed for the full CD term. There's also nothing preventing you from withdrawing your cash as needed.

If you'd rather, you could split some money between a savings account and one or more CDs. Weigh the pros and cons of each type of account and compare a few specific accounts before deciding which is right for you.