If you’re looking for a risk-free alternative to stash your cash, consider the option of picking up a CD.
Sure, you could open a garden-variety type savings account, but your interest earned could be minuscule or negligible. Your adviser might even suggest a high-interest or high-yield savings account as the smarter choice, but have you thought of the CD?
Not the album kind of CDs, but a certificate of deposit. While the top interest rates on high-yield savings accounts are currently topping out at 2%, you could find CDs that payout at 3% or more. To earn that extra interest however, you will have to give the bank some reassurances in return.
How does a CD work?
Here’s the catch: you would have to let the bank hold on to your money for months or even years. There are various CD terms that last six-months, two years or even five years. As you would expect, the longer the term, the higher the interest rate.
It is enticing to pick the long-term CD to take advantage of the higher returns. But if a financial emergency crops up down the road, the money in the CD remains untouchable.
Now let’s dive into some of the risks involved.
CDs are generally risk-free, you will never lose your investment in a CD as long as your account is at a bank linked with the FDIC or a credit union that is insured by the NCUA.
However, if you renege on your contract and decide to withdraw your money early, you will incur pernalties which could result in you giving up a substantial chunk of your interest.
To put it into perspective, if you close out a one-year CD half way into it, you will give up 6 months of interest. If you’ve only had the CD for 2 months though, the penalty would erode your original deposit.
An early withdrawal on a five-year CD might incur a penalty of a whole year’s worth of interest.
Another risk is that interest rates might rise while you have your money stuck in a CD. You are locked into that one interest rate for the entirety of the CD term, and you may miss out on the opportunity of better returns.
There are alternative CDs available to you that can circumvent these restrictions. There are liquid CDs, which allow you to make withdrawals easier, and bump-up CDs which allow you to take advantage of rising interest rates.
In order to enjoy that flexibility however, you would have to accept a lower interest rate when you begin the CD term. But if you are thinking about leveraging higher rates with a regular CD, there is a trick you can use called laddering.
It involves dividing your investment across multiple CDs staggered over multiple years. That way you have CDs that mature every year.
If you ladder your CDs, you will be able to take advantage of higher initial interest rates from long-term CDs and also have the opportunity to invest in new CDs down the road at even better rates.
Where to Start?
Looking to obtain a CD today? Head on down to your nearest bank or credit union. Small, local banks will give you better rates, and online-banks can offer better deals because of their lower expenses.
The minimum deposit for a CD could run you about $500 to $1000, some banks however have no minimum requirements. Do the necessary research to see which CD will give you the best rates for the best term.
Get your money out of a low-rate savings account and into a CD as soon as possible, plan for your financial future today!
For any other financial advice you may need, reach out and call the Financial Helpers at the number below.