Certificates of deposit can be a smart place to park some of your cash.
- CDs are a special type of bank account that pay higher interest on your money than you’d get from a checking or savings account.
- You get to pick your own CD term, so choose wisely based on when you’ll need the money.
- If you roll your earned interest back into 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. Thankfully, there are other places to stash it to help hedge 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’d get from your savings account or checking account) in exchange for keeping it locked in for a set period of time. They can be a good choice during periods of high interest rates (like right now).
And a 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 the 4,745 banks (as of this writing) insured by the FDIC. This means if your bank fails (it’s been known to happen), the Federal Deposit Insurance Corporation will cover up to $250,000 kept in a depository account.
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Sound good to you? Read on to learn six tips to finding the right CD account for you and your money.
1. Choose your term
One of the best things about CDs is that you get to choose your own term. The term is the length of time you’re locking your money away in the account so it can earn interest. Banks offer CDs in term lengths of as short as one month to as long as six years (or more). Generally, six months to five years are common term lengths. 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’re hoping to make money on your money when you open a CD, you’re going to want to look at the best CD rates available. You’ll generally find higher rates being 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 can also consider laddering your CDs to take advantage of a new interest rate every so often, especially if rates are rising.
3. Look at minimum deposit requirements
Some banks have no minimum deposit required for CD accounts, which will give you flexibility. Others require a certain amount to start, often a few thousand dollars. The amount you intend to put in the account should figure into choosing the best CD for you.
4. Consider fees and penalties
Fees aren’t generally something you have to worry about when it comes to CDs. But you will want to do your research and see what kind of penalties you may face for early withdrawal. Ideally, you’re putting money into a CD that you will not need until your term is up, but emergencies happen, and it’s certainly better to cash out a CD early than go into debt because you need money in a hurry. In most cases, your early withdrawal penalty will equal several months of interest earned on the money.
5. Find out how and when interest is paid
In most cases, interest on a CD account is compounded daily, which means you make more money. Check to see how the interest is paid out on the CD account you’re considering; many banks will just add it to the money already in the account, which means you can take advantage of the miracle of compound interest. If you’d prefer it be paid to you directly, open a CD with a bank that offers this.
6. See what happens when the term is up
Finally, make sure you understand what happens at the end of your CD term. Some banks will automatically roll your money into a new CD with the same term length, unless you specify otherwise. It’s generally a better idea to make that call yourself, rather than letting the bank decide what happens with 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 keep abreast of all the latest banking news and information, check out The Ascent’s banks coverage.
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