Want to Open a CD Today? Here's Why You'll Need to Proceed With Caution
KEY POINTS
- CD rates have been higher lately.
- While a CD might be a great home for your money, you should take a strategic approach to opening one.
- Consider laddering your CDs to get a better return.
Putting money into a CD requires some careful planning and strategy.
There are benefits to putting your money into a certificate of deposit, or CD. For one thing, you'll generally get to lock in a higher interest rate on your cash than what a savings account will pay you.
And also, when you put money into a CD, your principal deposit is protected. Of course, this assumes your deposit is limited to $250,000 and you're at an FDIC-insured bank. But in reality, you're probably not looking at putting more than a quarter of a million dollars into a CD, so that limit shouldn't be an issue for you.
Meanwhile, you may be particularly drawn to a CD right now because these products have been offering up higher interest rates lately. We can thank the Federal Reserve's interest rate hikes for that.
But if you're going to open a CD, don't just dump all of your spare cash in and call it a day. Instead, consider a strategy that will give you access to your money, all the while making it less likely that you'll miss out on even better rates should they come down the pike.
Spread out your cash across multiple CDs
If you have $5,000 you aren't using right away, and you don't want to invest that money in a brokerage account, then you may be inclined to put it into a CD -- especially now, with rates being more generous. But CD rates also have the potential to keep climbing in the coming months.
The Federal Reserve is not done implementing interest rate hikes. Rather, it intends to keep moving forward with them until the rate of inflation drops substantially. As such, if you put all of your money into a one-year CD right now, you'll lose out on the chance to capitalize if CD rates increase two, three, or four months down the line.
That's why a better bet is to employ a strategy called laddering. It involves splitting your money into different CDs with different maturity dates.
So, let's say you have $5,000 to work with and your bank has a minimum $1,000 deposit for CDs. You can split that $5,000 into four separate batches of $1,250. You can then put your first $1,250 into a one-year CD today, but then wait a couple of months to tie up your next $1,250. That way, if CD rates rise during that time, you won't get stuck with a lower interest rate on all of your money.
Plus, when you ladder your CDs, they come due at different times. And that gives you access to your money at different times, which is a good thing.
Be careful when opening a CD
CDs are appealing right now because they're finally paying more money. But don't rush to throw all of your spare cash into a CD. Instead, consider employing a strategy that could allow you to snag a higher rate of return on your money -- and walk away wealthier in the process.
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