In today’s high interest rate environment, a CD (Certificate of Deposit) This can be a great place to keep the money you are saving for the future. A CD can even help boost your savings with one Competitive interest rates.
But before you get started, CDs have some restrictions and details — including the time, or tenure, you have to keep your money in the account. If you choose a CD term that doesn’t align with your goals, you risk paying an early withdrawal penalty and forfeiting the amount of interest money you thought you’d earn.
In this article, we’ll look at CD term lengths and how to make sure you choose the right one.
Explore your CD options here to see how much more you can earn
How to choose a CD sound
Before you choose the right CD term for you, it helps to understand your term length options and how different terms might fit your goals.
What are CD terms?
when you Open a CDTerm length is the length of time you need to keep money locked in your account to avoid paying early withdrawal penalties.
In exchange for keeping your money in the account for the entire term, you’ll earn the fixed interest rate you agreed to when you opened your account. CD rates are often higher than par High Yield Savings AccountThat can make the lack of flexibility a worthwhile tradeoff for many customers.
CD terms vary widely; You can find CDs as short as one month or five or even 10 years. When you open a CD it’s important to have a goal in mind for your money, so you can choose a sound length that allows you both. Maximize interest and avoid fines.
Now know more about CD terms and current rates here.
When to choose a short-term CD
Common term lengths for short-term CDs include three months, six months, and one year. Short-term CDs are great for short-term goals, but they may not offer the same interest rates as long-term CDs. Often, short-term CD rates are comparable to rates offered by high-yield savings accounts.
That doesn’t mean short-term CDs can’t be beneficial, though.
If you already have money saved for a specific goal, a short-term CD can help you keep the money safe. Plus, you retain the flexibility to move your money around (or roll it into another CD) in the near future.
Here are some examples of savings you can put into a CD for a year or less:
You want to book funds for a vacation in the next few months. The cost of the equipment you want to buy to renovate an ongoing kitchen will save you money for wedding expenses next year
With a short-term CD, you’ll grow your savings with competitive interest rates and be less tempted to spend money elsewhere before you’re ready, since early withdrawals can result in penalty fees.
When to choose long-term CDs?
In general, you’re more likely to find the highest CD interest rates on longer CD terms, such as three- to five-year CDs. Because CDs have fixed interest rates, choosing a longer term can help you lock in a competitive interest rate today — one you’ll keep even if rates drop over time.
As with short-term CD terms, it’s a good idea to have a goal in mind for the amount you’ll put into a long-term CD. You don’t want to risk paying penalties for early withdrawal. CDs also limit contributions (and many don’t allow you to make contributions after your initial deposit), so these accounts are best for money you’ve already deposited.
Here are some examples of the types of savings to add to a long-term CD:
A down payment on a house you plan to buy in a few years Future continuing education or tuition costs to supplement your child’s education
Now compare your long- and short-term CD rates here.
Is a CD right for you?
If you set aside money for future goals, you can earn a competitive interest rate and ensure that your money stays safe. Certificate of Deposit.
There are cases where a CD may not be the best choice. For example, it is often better to keep one emergency fund In a more flexible high-yield savings account (which you need to access at short notice). Alternatively, long-term retirement savings may serve you better in a dedicated retirement account 401(k) or an IRA.
If you choose a CD, make sure you get the most out of it by choosing a term length that will help you get the best combination of interest rate and affordability for your goals.
MoneyWatch: Managing Your Money
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