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While high interest rates have hurt borrowers, they have helped savers earn more on savings accounts, including: Certificate of Deposit (CD) And high-yield savings accountsThese accounts have also helped savers offset inflation and earn higher returns.
Inflation has cooled in recent months, falling 0.1% on a seasonally adjusted basis in June, according to the Bureau of Labor Statistics’ latest inflation report. As a result, CD rates have decreased slightly.
Despite the drop in interest rates, many experts argue that there are still benefits to opening a CD account in the current interest rate climate. But since every CD and lender is different, you should know if a CD is right for you before you open an account. Below, we’ve listed a few factors to consider now.
See how much more you can earn with your money with a CD here.
4 Ways to Know if a CD Account is Right for You
Not sure whether to open a CD now? Here’s how to determine if it’s the right move:
It offers a higher annual percentage yield (APY)
It’s wise to shop around and compare banks to determine which one offers the highest APYs. According to the FDIC, average APYs on CDs range from 0.23% (1-month CD) to 1.43% (60-month CD). But by shopping around online, you can easily an account with an interest rate of 5% or higher nowespecially if you have a online bank“Online banks and credit unions often offer higher rates because overhead costs are lower than traditional banks,” says Taylor Kovar, founder and CEO of 11 Financial, a financial advisory firm.
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It has the right term length
Financial advisors often recommend that you CD termor length that suits your goals. That way your funds will adult when you need them, and you maximize your interest income. Remember that if you withdraw money early, you will have a penalty for early withdrawalwhich can wipe out your income.
Kovar notes, “If you have short-term goals or anticipate needing access to your funds sooner, a shorter-term CD may be a better option. If you can tie up your money for a longer period, a longer-term CD may provide better returns.”
You may also consider making a cd ladder strategy. CD laddering occurs when you make deposits into different CDs with different maturity dates. This allows you to access your funds more frequently while locking in different CD rates.
While most CD ladders involve setting up multiple CD accounts, Andrew Hall, vice president and wealth advisor at wealth management firm Farther, notes that you can combine them into one account through a brokerage. “Consider a ladder of CDs if you want to match a monthly or quarterly payment. In a CD ladder through a brokerage, a saver can diversify across CDs from different banks in one account. You can then automate the distributions to go into your checking account.”
The minimum deposit is payable
Most CDs require a minimum deposit to open a new account, usually ranging from $500 to $2,500. Before you open an account, make sure the minimum deposit is affordable. If you don’t have the funds to open a new CD account, consider saving for it or opening a high-yield savings account or other low risk options.
With a standard CD, you can only deposit money into your account when you open it. If you have the funds available, you may want to consider depositing more than the minimum deposit amount, since you cannot contribute funds during your term. In general, you can maximize your income by depositing into a CD with a longer term, although this is not always the case.
The penalty for early withdrawal is not too high
Despite the best-laid plans, you may need to access the funds in your CD account before they mature if an unexpected expense occurs. In this case, you will likely face an early withdrawal penalty, which varies widely depending on your bank and CD term. Penalties usually require you to forfeit interest for a specific period of time, ranging from 30 to 180 days.
Kovar suggests calculating whether the penalty will wipe out the interest earned if you need your money before the CD matures and suggests looking at CDs without penalty as an alternative.
Find out more about your current CD options online.
it comes down to
CDs are generally a safe bet and a way to guarantee a return, as long as you keep your money in the account until it matures. Opening a CD account can be a good option if you have a lump sum of money that you want to keep safe while also earning a higher interest rate than a regular savings account. This strategy can help you achieve a short-term financial goal by providing you with a predictable return that ideally matures when you need the money.
