A Beginner’s Guide to CDs
If you’ve been feeling the pain of paying higher prices for groceries, gas and virtually anything else you buy, take heart. There is a bright spot in today’s inflationary environment: As the Federal Reserve Bank strives to stabilize prices by raising interest rates, your savings has the potential to earn more. Being a good saver can help you build your finances even in difficult times.
Why CDs can be a good option for saving
Savers can earn interest on their money in several ways, including depositing funds into a savings account, which pays interest on your balance each statement period; a money market account, which commonly combines some features of a savings and a checking account; or a CD, a certificate of deposit, which typically offers a higher rate of interest than either a savings or money market account.
CDs are available with varying terms, from a few months to several years, to help you meet both short- and long-term savings goals. They offer a steady interest rate and a guaranteed return, with the safety of FDIC insurance (provided they are issued by an FDIC-insured financial institution).
Financial institutions are able to offer higher, fixed interest rates on CDs because they hold your money for a specified time period. While it is possible to withdraw funds from a CD prior to the end of its term, you may pay an early withdrawal penalty for doing so. Your potential to earn the full financial reward of your CD is contingent upon you not touching that money for the full term.
How to Choose the Right CD for Yourself
If you decide to stash some of your savings into a CD, shop around for the features, term and annual percentage yield (APY) that make the most sense for your circumstances. APY, the rate earned on a particular investment in a year, can be a better comparison tool than interest rate, because it factors in the effects of compounding interest. (Compound interest is interest earned on not only the principal — the amount initially deposited in a CD — but also any accumulated interest).
Here are some considerations to keep in mind as you compare CDs:
The amount you want to deposit (principal)
As you decide how much money to deposit into a CD, make sure you are including only funds you will not need to access during the months or years you commit to. If you need greater accessibility to your funds, with the opportunity to withdraw money as you need it, a savings account is likely to be a better savings vehicle for that portion. Also look for minimum deposit requirements: Many CDs have them.
The CD term and APY
Investing in a CD effectively locks your money in through its maturity date, so choose a term that you know you can live with. Longer-term CDs tend to offer higher APYs, but that’s not always the case; some financial institutions may at times offer special rates on shorter-term CDs. It’s your personal choice as to how long you are comfortable setting your money aside and how much you’d like to earn.
Be aware that when a CD reaches its maturity date, there may be a short window of time (often seven days) during which you can withdraw your money before it is automatically reinvested in a new CD. Be sure you understand the terms and conditions of your CD before opening the account.
The type and features of the CD
Traditional CDs enable you to deposit the amount you want (provided it meets any minimum requirement) for the length of time you want (subject to established term lengths). Depending on the product and issuer, you may be able to choose whether to let your interest accumulate or receive interest checks at established intervals throughout the CD’s term.
Some banks go beyond the traditional CD to offer you options that may more closely align with your needs. Dollar Bank, for example, offers these CD choices:
Traditional Term CD - You choose the term (six months to 10 years), and the amount ($2,500 or more), and you have the option to receive interest checks monthly, quarterly, semiannually or annually.
Rising Rate CD - A Rising Rate CD gives you the choice of accessing your money every 90 days or allowing it to accumulate and earn a higher interest rate.
Bump-up CD - While a CD’s interest rate is typically fixed for its full term, a Bump-up CD gives you the opportunity, if interest rates rise while you’re holding the CD, to bump your CD up to a higher rate for the remainder of its term.
Three-month No Penalty CD - This short-term CD option affords a guaranteed return with more liquidity than other type of CDs. You can access your funds anytime from seven days following your deposit through its full term without paying a penalty.
Any penalties for early withdrawal
Unless you are investing in a CD that is free of early-withdrawal penalties, find out the amount you would be charged in the event you needed to access your funds before the CD’s maturity date. These penalties can vary widely across financial institutions and CD products.
If you are looking for a guaranteed rate of return that is generally higher than a savings account, a CD or group of CDs may be right for you. Find out more by calling Dollar Bank at 1-800-242-2265 or visit your local branch.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.
Posted: August 16, 2022