One Move You Must Make Before Opening a Certificate of Deposit
- CDs commonly offer higher interest rates than savings accounts, but they require you to lock your money away for a period of time.
- It's important to research your options if you're going to open a CD.
Make sure to check this off your list.
The great thing about certificates of deposit, or CDs, is that they commonly offer higher interest rates than savings accounts. And if you have money you're not looking to invest (say, cash you might need within the next five years or so), they offer an opportunity to earn a little more interest on your cash.
But if you're going to open a CD, you must spend some time looking at what different banks are paying. A little research could score you a higher return on your money.
Do some digging
The interest rate you'll get on your CD will hinge on different factors. These include the bank you choose as well as the term you choose.
Generally, the longer your CD term, the more generous an interest rate you'll get. But it's also important to look around and see what different banks are paying, especially if you're planning to tie your money up for a longer period of time.
In fact, one place you may want to look as far as a CD is concerned is an online bank. Online banks don't have physical storefronts to maintain and staff. Since their overhead is relatively low, they tend to pass savings onto customers in the form of higher rates on their various savings products, including CDs.
How long should you lock up your money for?
As mentioned, opening up a longer-term CD will generally result in a higher interest rate than what a shorter-term CD will give you. But that doesn't mean a long-term CD is the right way to go.
When you put money into a five-year CD, for example, you run the risk that interest rates will rise at some point during that term. If that happens early on, you could be stuck with a lower rate for years. And while there's always the option to cash out your CD, doing so will mean facing a penalty of lost interest, the amount of which hinges on your bank as well as your CD term.
These days, CD rates are finally rising thanks to rate hikes on the part of the Federal Reserve. But even so, proceed with caution when opening a longer-term CD. There's a good chance rates will end up being more generous later this year or next year than they are today, so you may want to stick with a shorter-term CD -- say, a six-month or one-year CD -- for now.
Get the best deal
You may have cash you're stocking away for a fairly near-term goal -- say, buying a house in three or four years. That's not money you should be investing, whereas with a CD, your principal is protected. But before you open a CD, spend a little time researching what different banks are paying so you ultimately walk away with the best possible deal.
Granted, you may, to play it really safe, want to keep money you're socking away for a near-term goal in a regular savings account to get more flexibility as far as withdrawals go. But if you know you need to save up $80,000 to buy a house and you only have $10,000 right now, then chances are, that goal isn't happening within the next year. And so in that situation, a shorter-term CD may be a good solution for you.
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