How to Choose the Best CD Rate For Your Financial Goals How to Choose the Best CD Rate For Your Financial Goals
Certificate of Deposit, also known as a CD, is an interest-bearing that comes with a fixed interest rate for a set term. CDs require an initial deposit that needs to remain untouched until the account reaches its maturity date (called the “term”), unless the depositor is willing to incur an early-withdrawal penalty. When opening a CD, it's important to pick a CD term that aligns with your financial goals. Below, we'll outline how you can pick a CD account that will help you maximize your savings.
How Do CD Accounts Work?
As we outlined briefly above, when opening a CD you'll select an account term (generally anywhere from a few months to five years) and receive a fixed interest rate base on the term. This means that unlike other savings accounts, your interest rate will not change based on market fluctuations for the duration of your account term. For instance, if the Federal Reserve cuts interest rates in the middle of your CD term, your rate will remain unchanged. The flip side being that if the Federal Reserve hikes rates during your CD term, your rate will also remain unchanged. This is why it's important to do your research into the wider rate landscape before opening a CD. CDs generally offer higher interest rates than traditional savings accounts, which is one of the main features that make them a lucrative investment option.
The other important feature to consider when opening a CD is when you'll need access to your funds again. As mentioned above, once you open a CD you'll have to leave your deposited funds untouched until your account reaches maturity unless you're okay with being assessed an early-withdrawal fee (more on that below).
How to Choose the Best CD for Your Financial Goals
There's no one size fits all when it comes to Certificates of Deposit -- it truly depends on finding the right account to match up to your savings goals. For instance, if you want to grow a chunk of your savings to save up to purchase a home next year, you probably don't want to choose a five-year CD to help you build your savings. Once you consider what CD term aligns with your savings timeline, you'll want to take some time to research what is expected to happen to CD rates over the course of your CD term. If the Federal Reserve is expected to raise rates you may want to select a short-term CD instead of a multi-year CD because you won't want to be locked into a lower rate if rates are expected to go up. On the other hand, if the Fed is expected to cut rates, a longer-term CD may be more lucrative because you can lock in a higher rate.
Different Types of CDs
Below, we'll go into greater detail about the different types of CDs available to help you grow your savings as well as some CD saving strategies that can help you take advantage of higher interest rates while maintaining a certain level of liquidity with your funds.
Short-Term CDs vs. Long-Term CDs
There are several important differences to note between long- and short-term CDs -- let's start with the obvious. Short-term CDs generally mature within one year while long-term CDs can have terms of up to five years. With respect to interest rates, short-term CDs usually offer lower interest rates than long-term CDs (that's the tradeoff for getting access to your funds more quickly). However, at Leader Bank this isn't true -- we're proud to offer several short-term, high-yield CDs. As we already mentioned, another key difference between these two types of CDs is liquidity -- if you're saving up for a purchase that's coming up within a year, you'll likely want to pick a short-term CD that aligns with the timing of that purchase.
No-Penalty CDs
No-Penalty CDs, also known as a Liquid CD or Breakable CD, is exactly what it sounds like. These accounts allow you access to your investment before the maturity date with low or no penalty fees. While this is extremely convenient if you need access to your funds, the tradeoff is that these accounts generally offer lower interest rates than traditional CDs.
Bump-Up CDs and Variable-Rate CDs
Both of these accounts are a good option if there is uncertainty around the rate environment when you are locking in your rate. Bump-Up CDs offer a one-time rate increase during the account's term while Variable-Rate CDs offer an APY that moves with an index rate, meaning this is a good option if rates are expected to go up (and stay up) over your account term, but the interest rate could also go down if the market moves in that direction. Both Bump-Up CDs and Variable Rate CDs generally have lower interest rates than traditional CDs -- the tradeoff for more rate flexibility.
CD Ladders
A CD Ladder is a savings strategy that involves opening multiple CD accounts with different maturity dates to take advantage of higher interest rates while keeping a portion of your savings liquid at all times. By opening a mix of longer- and shorter-term CDs you'll enjoy the higher rates of long-term CDs while maintaining liquidity through shorter-term CDs. When the first CD in your ladder matures, you have the flexibility to reinvest the money into another CD to continue the ladder strategy, reinvest the money elsewhere, or use it to achieve a savings goal.
For example, let's suppose you have $5,000 to invest and want to build a five-year CD Ladder:
- $1,000 in one-year CD
- $1,000 in a two-year CD
- $1,000 in a three-year CD
- $1,000 in a four-year CD
- $1,000 in a five-year CD
After the one-year CD matures, you reinvest the $1,000 (plus interest) in a new 5-year CD, and so on for each subsequent year as each CD matures. This means that every year you'll have a CD term maturing and the funds available for reinvestment while still benefitting from the higher interest rates of CDs with longer terms.
What Are CD Early Withdrawal Penalties?
As discussed above, most CDs come with early withdrawal penalties. How do these work? Usually, your bank or credit union will assess you a fee for withdrawing money from your CD before the maturity date on the interest you've gained before you get your money back. Most commonly, the fee will be charged as several months' interest -- the longer the account term the more months' interest you could be assessed. Every financial institution will outline these fees clearly in your account terms, so it's important to review these stipulations when you are opening your account.
How to Get Started Saving With a CD
Opening a Certificate of Deposit with Leader Bank takes only a few minutes and can be done online from anywhere! We have exclusive high-yield short-term CD offers available to help you maximize your savings while maintaining liquidity with your funds.
