Ask the Geek: When and Why Should You Open a CD?

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2022 hasn’t been kind to our wallets. However, as prices rise (i.e. inflation) has at least one benefit. Interest rates on savings accounts have increased, including certificates of deposit.

Some CDs are currently earning over 3%, but like any bank account, they are not suitable for all financial situations. Let’s see if the CD makes sense for you.

If you arrived at this article thinking of CDs as compact discs for music, sorry, good luck with your old-school music collection.

In banking, CD refers to a certificate of deposit. This is a kind of savings account with fixed term and fixed interest rate. Add money, wait for the term of the CD (usually 3 months to 5 years) to end, and get your money back with interest.

The main places to open CDs are banks and credit unions, which are banking nonprofits. Credit unions tend to refer to CDs as “share certificates.” Brokerage firms also offer CDs, but the process is more complicated and requires an investment account.

The top reasons to consider CDs are: CDs can offer the best guaranteed returns to your bank account.When Current CD Rate NerdWallet’s analysis of the Fed’s data and its own data resulted in the highest number in a decade.When the Federal Reserve raise the rateas will be multiple times in 2022, banks typically raise savings and CD yields.

Arguably, the best rates are with online-only institutions. At the time of writing, the 1-year CD yields over 2.3% per annum, the 3-year CD has his APY over his 2.7%, and the 5-year CD has his APY over his 3%. is exceeded. In contrast, the national average CD rate is below 0.70%, still better than his 0.13% national average for time deposit accounts.

Consider this scenario: $10,000 invested in a 3% CD over a 5-year term yields approximately $1,600 in interest. If you try the same amount and time frame in a savings account with 0.13% interest rate, you can earn about $65. I would choose the first option.

Unlike some checking and savings accounts, CDs have no monthly fees or minimum balance requirements other than a minimum opening amount. High Yield CD minimums range from $0 to $10,000.

A CD is a bank account equivalent to a lockbox. Give up access to funds in exchange for higher interest rates. Most of the time you only add money the first time you add it, so you should be comfortable putting a good amount of cash into your account up front. After that, your money will be locked for the duration of your chosen CD.

If you need to cash CDs early, it can hurt. All money must be withdrawn in one transaction and most pay the penalty It can cost you several months to a year’s worth of interest you earned or would have earned. However, unlike other bank accounts, CDs have only one potential cost and can be avoided by waiting until the CD expires.

CDs have more specific use cases than everyday checking and savings accounts. Ask yourself any of these questions before deciding to open one.

Let’s say you run into an inheritance or some other type of windfall. Or you’ve accumulated savings over the years. Or you are like my parents who save some money in stock certificates and keep them out of reach as I grow up. Whatever the reason, CDs are made to keep you from wanting to spend those funds.

If you have an amount to pay for a down payment on a car or home in the next few years, a CD can help secure the funds until you’re ready.

CD provides short-term safety, not long-term growth. Funds are federally insured just like any other bank account. This means that even if your bank goes bankrupt, your funds will be returned to you. Also, unlike the stock market, there is no risk of price fluctuations.

CD “falls between emergency savings and investment,” says Derek Brainard, national director of financial education at the AccessLex Institute, a nonprofit financial literacy.

Essentially, CD is a cash reserve for short-term goals. emergency savings Investing in things like stocks and bonds is meant to accumulate wealth over the long term, Brainerd explains, although you should have quick access to it if you need it.

While it may be difficult to let go of the idea of ​​high CD rates, you may find that losing access to funds is not worth it.You can still take advantage of the rising rate environment by opening high yield savings accountSimilar to high-yield CDs, these accounts are available primarily at online-only banks and credit unions. Many rates are now close to 2% APY and you can add or remove money at any time.

Fixed interest rates for CDs can be a double-edged sword. In other words, it offers a guaranteed return, but if interest rates rise, you will lose the higher interest rate after you lock in your own interest rate. And the rate has been going up recently.

“If you believe the rising interest rate environment will continue, one strategy for offsetting that risk is proof. [or CD] CJ Pointkowski, Assistant Vice President of Savings Products, Navy Federal Credit Union, said:

CD Ladder, or Creating a CD CD ladder, you need to open multiple CDs of different time periods, usually short, medium and long. A common ladder consists of one to five CDs, with five CDs maturing at staggered intervals, such as each year for the next five years. After each CD is finished, you can reinvest in your new 5-year CD to take advantage of higher interest rates in the future, or withdraw cash.

If juggling multiple CDs seems tedious, another strategy is to open CDs without penalties. This less common type of CD offers free early withdrawal anytime after the first few days, removing barriers to later switching to higher-rated CDs. However, price alone should not guide your decision to open a CD.