CDs are pretty popular these days, and for good reason. With many CDs paying APYs of 5.00% or even a little bit more, it’s hard to say no to an opportunity to snag that sort of risk-free return on your money.
But if you’re thinking of opening a CD this month, it’s important to go about the process strategically. Here are a few tips you can employ to maximize your CD profits.
1. Shop around for a great rate
You may be inclined to jump on the first CD offer you see if the rate is attractive enough. But remember, when you open a CD, you commit to keeping your money in the bank for a preset period of time — whereas with a savings account, there’s no such commitment. So if you’re going to do that, then it pays to earn as much interest as possible.
To that end, resist the urge to open the first CD you find with a great rate. Instead, keep shopping around. Look at different banks and different CD terms, and only once you’ve taken some notes and done some comparisons should you move forward with choosing one CD over another.
Our Picks for the Best High-Yield Savings Accounts of 2024
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American Express® High Yield Savings APY 4.25%
Circle with letter I in it.
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APY 4.25%
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Min. to earn $1 |
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Citizens Access® Savings
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Min. to earn $0.01 |
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Bask Interest Savings
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Min. to earn $0 |
2. Set up a ladder
One drawback to opening a CD is that if you end up having to withdraw your money before it matures, you could face a costly penalty. Now the exact amount of that penalty will depend on your bank. But if you open a 12-month, $5,000 CD at a 5.00% APY and your penalty for an early withdrawal is three months of interest, you risk losing $62.50.
Before you decide to put all of your money into a single CD this July, consider a ladder. This has you splitting up your funds into multiple CDs with varying terms so that some of your money frees up every few months.
With $5,000, you could open five CDs as follows:
- Put $1,000 into a 3-month CD
- Put $1,000 into a 6-month CD
- Put $1,000 into a 9-month CD
- Put $1,000 into a 12-month CD
- Put $1,000 into a 15-month CD (and if you can’t find this, you could do an 18-month CD instead)
Laddering your CDs doesn’t completely eliminate the risk of an early withdrawal penalty. But it could reduce it substantially.
3. Look at the big picture
You’ll generally find the best rates available today for shorter-term CDs than longer-term ones. That’s because it’s a known thing that the Federal Reserve plans to start cutting rates in the near term. Banks don’t want to offer the same CD rates for products with a 3- or 4-year term as they do for a 12-month term because that’s more risky for them.
You may be inclined to open a 12-month CD if that’s the best APY you can find. But a 3-year CD might pay you more in the long run.
As an example, say the APY on a 12-month CD is 5.00%, compared to 4.00% for a 3-year CD. With a $5,000 deposit, the 3-year CD has you earning $624 of interest in total. A 12-month CD, on the other hand, has you earning $250 your first year. Beyond that, it’s hard to know what you’ll be able to earn. But you run the risk of not getting to $624 if rates fall by a large degree in the coming year or two.
Before you rush into a shorter-term CD, look at the big picture. If you’re saving for a goal that’s a few years away, it could pay to opt for a longer-term CD for the guaranteed interest you can earn during that time.
It’s certainly a great time to open a CD based on how rates stack up. But definitely look at incorporating these tips into your CD strategy, so you can make the most money this July.
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