You know you need a savings account (and possibly more than one), but is that savings account doing all it can for your money?
Your typical savings account from a big bank has an interest rate of 0.01% – and sometimes less – making your money grow at a relative snail’s pace. When you’re really looking to boost your savings, you could look toward high-interest accounts, but even these tend to have between 1-2% Annual Percentage Yields (APYs). Better than nothing, but what if there was a way to store your money safely while helping it to grow?
Here’s a little secret: Certificates of Deposit (CDs) are designed to do precisely that. But how does a certificate of deposit work and why do so many people use them to save?
I started separating out some of my finds into CDs a couple of years ago, and I staggered them so I always had one relatively close to maturation should I need it. CDs have helped me keep my hands off of my money, and I get a kick out of the fact that my accounts are always guaranteed to grow – no more worries about risky investments leaving me with nothing.
But CDs aren’t always right for everyone. If you’re wondering how CD accounts work, and whether they’re ideal for your situation, the following information will help guide you in the right direction.
1) How Do CDs Work?
CDs are a simple type of savings account in which you deposit money into an account that has a set interest rate, leaving your money to grow until a set maturation date. The most common CD maturation terms you’ll find are:
- 6 mos
- 9 mos
- 1 yr
- 18 mos
- 2 yr
- 5 yr
How do CD accounts work to save you more than other savings accounts? The bank knows they can count on your money being there, and so they can offer you higher interest rates. When you leave your money in your account until it matures, you receive the full initial investment and any accumulated interest.
2) Are You Risk-Averse?
Leaving your money in a secure checking or savings account will help protect it more than keeping it in your sock drawer, but you won’t be putting it to use at all. On the other hand, risky investments can promise big returns, but they can also cause you to lose everything you have.
What is a CD account like? Consider CDs a happy medium of regular savings accounts and other investments. First of all, you know your money is going to grow from the time you deposit it to the time you withdraw it, as you’ll have a fixed interest rate for the life of your account. Plus, your money will be as safe as it is in any account, as banks will issue CDs that are covered by FDIC insurance.
3) Do You Need Your Money To Be Easily Accessible?
How does a certificate of deposit work to build your money? A downfall of CDs is that you are penalized if you need to access your funds before the maturity date. Banks will charge a fee, which can knock out any accumulated interest and even your initial principal.
Choosing short-term CDs can be a great way to relieve some of the concern of not being able to get to your money. Right now I have two six-month CDs with maturity dates at different times of the year. I’m pretty much guaranteed that I’ll have the ability to access one of the accounts without waiting too long should I need to.
4) Do You Have Time To Wait?
To get the most significant benefit of a CD, you want to have the highest interest rate possible. But most banks will tier their CDs so that the longer the maturity date, the higher the rate.
The best way to take advantage of higher rates with longer terms without sacrificing accessibility to your money is to stagger your CDs into different term lengths, what is often called “laddering” CDs. This is how mine are currently structured:
- Two 6 month terms (staggered dates) with rates of 1.05%
- Two 12 month terms (staggered dates) with rates of 2.3%
- One 5 year term with a rate of 2.7%
When they mature, I have the option of automatically renewing into the same or a different term, or withdrawing the funds altogether. With my CDs laddered the way they are, I always roll over my accounts with their accumulated interest, meaning I’m earning more and more with each renewal. Even the five-year term doesn’t feel so long because I have plenty of activity from my other CDs throughout the year.
5) Would You Like To Start Saving For Your Future?
In terms of benefits, what does a CD offer beyond a high-yield savings account? Besides the chance for a higher interest rate and APY, you can also take out different types of accounts based on long-term goals.
For example, if you’re looking to start a retirement account, you can open individual retirement accounts (IRAs) which will be held as CDs.
You can also have CDs as trusts and custodial accounts, or even joint accounts for your family.
6) Where To Find The Best CD Options?
As with other types of savings vehicles, if you decide on a CD from a major bank, you could be receiving rates far lower than you would in an online bank’s savings account. In fact, as of July 2018, the major banks’ CD rates for a one year term are:
With these rates, you may be better off keeping your money in a savings account, where you know you can access it if you need to.
Or, in the case of CDs, you could look to online banks for the best interest rates and APYs currently on offer. In many cases, online banks are now offering different types of CDs, like early-withdrawal options without penalties and an opportunity to lock in a better rate during the life of your CD.
Some of the best options from online banks include:
The current rate as of July 2018 for a one year CD from Marcus is 2.3%, and you only need $500 to open one. They offer several different terms, and higher APYs tend to come with the longer ones.
2) Ally Bank
Ally has a number of CD options for those who want to have access to their money or get a chance to lock in a higher rate during their term. With a Raise Your Rate CD, you can choose two or four-year terms with an APR of 2.5% (as of July 2018), and you’ll be able to raise your rate if a higher one is offered.
With terms of 3 to 60 months, you’ll find Synchrony offers a chance to ladder your CDs in a way that your money is never too inaccessible and you’re always saving.
So if you’re asking, ‘how do CDs work to help you boost your savings’, the answer is, they are a boost to savings because they protect your money from risk and from yourself with a guaranteed interest rate higher than a savings account. If you’re ready to diversify your savings into multiple accounts, it’s worth exploring CDs today.