Certificates of deposits (CDs) are an excellent way to safeguard your funds while improving your savings. CDs are a type of savings account that uses fixed rates and set terms. CDs vary depending on factors such as APY rates and term lengths. APY rates are important because they indicate the annual percentage of interest that a CD will obtain throughout a year. Unlike more traditional savings accounts, CDs require an individual to keep a deposit within the account for the entirety of the previously agreed upon timeframe.
Short-term CD account lengths such as six-month periods encourage saving while also increasing an individual’s amount of financial flexibility. A CD is an excellent way to begin investing while also saving for the future. Before buying a CD, consider speaking with a financial professional to more clearly understand the best options for you.
Best for No Maintenance Fees: Live Oak Bank
Live Oak Bank is a digital bank that has services available in every state.
The company requires a minimum deposit of $2,500 and a maximum deposit of $250,000. Funds are backed by the the FDIC. Individuals are able to select renewal preferences online. Once a CD reaches maturity, a person has 10 days to decide how to handle the funds. In general, it’s better to decide on how funds will be used before the maturity date, but the grace period does provide a useful buffer in the event of unforeseen circumstances.
In terms of fees, the company does not have any monthly maintenance fees. However, it does include early withdrawal penalty fees which vary in severity depending on when an individual elects to take out funds. For example, terms under 2 years typically have an early withdrawal penalty fee of 90 days of simple interest. The online application is only available for individuals.
Best for Varied Interest Payment Options: TAB Bank
TAB Bank is an online bank that began in the late 1990s. It offers financing options for both companies and individuals. It requires a minimum deposit of $1,000. No visibly stated maximum deposit for a 6-month CD account on the website. The minimum balance must be maintained to obtain the stated APY. The company has fixed interest rates that give financial predictability.
The company will automatically renew CDs if an alternative option is not stated within the 10-day window. The 10-day window happens once a CD reaches maturity. Interest can be paid in various forms such as checks or transfers.
Early withdrawal penalty charges are not clearly stated, but the fee functions as a term-specific interest penalty.
Best for Higher APY: Limelight Bank
Limelight Bank is an online bank that’s based in Utah. The bank is insured by the FDIC. The company provides an online mobile application for more seamless account access. The account can be funded in a variety of ways such as an electronic funds transfer, wire transfer or a check.
The CDs cannot be used in combination with a trust or a business. CDs are only designed to work with individual consumers. The company charges an early withdrawal penalty.
Best for Minimum Deposit: Bethpage Federal Credit Union
Bethpage Federal Credit Union has offered financial services within the United States for over 80 years and served over 300,000 members. Anyone can become a member. At a credit union, CDs are normally referred to as certificates. Bethpage offers a wide variety of certificate terms and rates. The company requires a relatively low minimum deposit of only $50. The minimum deposit is lower than many other banks and credit unions.
The credit union is insured by the NCUA. Once a certificate reaches maturity, customers have a seven-day window where a person can decide how to renew or change the account.
Best for Flexible Maturity Options: Pentagon Federal Credit Union
Pentagon Federal Credit Union, or PenFed, was first founded in 1935 and has assisted over 2.5 million members. Anyone can become a member. The company has 6-month CD terms that require a $1,000 minimum deposit. The credit union is backed by the NCUA.
CD accounts offer varied payment options such as adding dividends to the CD account and sending dividends to customers using a check. The credit union also has flexible maturity options such as rolling the amount over to another account or sending funds using a mailed check. However, such account decisions must be made before a CD’s maturity. The company also allows individuals to decide if they would like to have their dividends withdrawn monthly or once the account matures. Early withdrawal penalties are charged.
Features to Look for in CDs
When researching various kinds of CDs keep in mind features such as a company’s customer service reputation, potential early withdrawal fees and APY rates. Comparing these features allows you to make an informed choice when selecting a CD.
When comparing CDs, research APY rates. Rates are higher for accounts that have longer term lengths. However, APY rates associated with short-term CDs are still helpful for individuals interested in stability and a higher return than a savings account. Because CDs usually have competitive APY rates, they are still a strong option for funds that people will not need to access during the span of six months. Although six months might seem long, it’s one of the shortest available CD lengths; timelines can extend up to 10 years.
APY rates for CDs are usually higher than other traditional savings accounts, which can prove beneficial for an individual that will not need to touch the funds placed into the account for an extended period.
Examine how companies structure their fees. Most entities charge no extra fees for buying a CD; however, it’s common for financial institutions such as banks and credit unions to charge early withdrawal fees. The early withdrawal fees are a type of penalty imposed on an individual for failing to keep funds in an account until the time of maturity.
Early withdrawal fees are commonly charged as an amount of interest. For example, some companies charge penalty fees such as several months' worth of interest. Such a steep withdrawal fee is intended to deter people from taking funds out early. Compare each CD's different fee structure to understand which option would likely work best for you.
Strong customer service
When examining the CD options provided by various companies, be sure to research the strength of their customer service. Companies usually offer multiple ways to get into contact with their customer service representatives such as an email address, social media and a phone number. Check to see if the website has a page that addresses frequently asked customer questions.
Visit websites that collect and rank customer reviews. When reading the customer reviews, try to find the most recent ones as well as the higher-ranking and lower-ranking opinions. It’s important to observe positive and negative viewpoints to have a fuller perspective about a company’s performance with its customers. Customer reviews indicate how you will likely be treated if you decide to become a customer.
Flexible maturity options
Contemplate different CD account payment options before an account reaches maturity. For example, certain companies include several ways that an individual is allowed to handle an account once it reaches maturity. Options range from cashing out the account to automatically renewing it to moving the money to a CD with a shorter or longer term. However, these options are typically time-sensitive and usually must be selected before an account reaches maturity.
While most companies provide a grace period that can range several days after an account reaches maturity, it’s best to research each specific CD before opening an account to understand what happens at maturity.
How to Get a CD
When planning out how to obtain a CD, examine your current financial goals and personal timelines and research how a CD will likely meet your future needs. If you have any questions, speak with a financial professional to make sure that the specific CD that you select will align with your needs.
Research insured institutions
Before buying a CD, make sure that the financial institution providing the service is insured. Banks and credit unions are insured to help mitigate the level of risk that individual customers are exposed to. Banks are insured by the FDIC, which is designed to help protect funds up to $250,000. Credit unions are covered by the NCUA, which insures funds up to a maximum amount of $250,000 for each depositor.
Examine different types of CDs
CDs differ in both types and terms, so make sure that the features will work together to help you effectively achieve your financial goals. CD types span from high-yield CDs to bump-up CDs. The CDs often have a wide selection of term length options. It’s most common for CDs to have set timelines between six months and five years, but other companies offer CDs for up to 10 years.
A CD account should only be opened after an individual already has a steady amount of savings as well as an emergency fund set aside. The funds placed into a CD are not intended to be withdrawn before the date of maturity, so think about how far into the future you will likely be able to comfortably lock away your funds before selecting a specific CD term length.
Research interest payments
When opening an account, certain institutions might ask how an individual would like to receive interest. Examine how frequently interest is compounded once it enters your account to see how you are likely to make the most money on your deposit.
Open an account
When opening an account be sure to have additional financial information available to expedite the process. A financial institution will likely ask for extra details when reviewing your application. The companies generally ask for your address, contact information and social security number.
To ensure a speedy application process, take your time answering forms and filling out the information. If you have any questions, reach out to a customer service representative for clarification to avoid entering incorrect details.
How you can Improve Your Finances
Improving your finances requires time and diligence. When deciding how to boost your financial situation, contemplate your debt-to-income ratio, investing goals and savings needs. While deciding on the best way to improve your finances, think about speaking with a financial professional.
#1 Know your spending
When looking into your finances, it’s important to examine how much you make compared to how much you spend. For example, examine the debt-to-income ratio to have a stronger understanding of how debt relates to income. A debt-to-income ratio reveals how much is earned versus how much is spent.
#2 Pay off debt
Paying off debt often increases your credit score and the strength of your financial history. Credit scores are designed to indicate an individual’s creditworthiness and show how efficiently a person is able to pay off debt.
Consider setting up automatic payments to avoid late payments and unwanted penalties. Automatic payments are not recommended for people that will likely not have the funds available within an account at the time of automatic withdrawal. Having missing or insufficient funds during the time of an automatic payment will negatively impact a credit score.
Build your savings
After addressing your spending and debt, think about your current and future savings. Savings are a way to prepare for the future by collecting and potentially growing funds for unforeseen expenses. Think about creating or strengthening your emergency fund before investing. An emergency fund should cover at least three months worth of expenses. Remember to update the emergency fund as your lifestyle grows and spending increases. Emergency funds need to remain liquid to be easily accessible during a sudden unforeseen expense.
Create an investing plan
When creating an investing plan, examine the possibility of having several different timelines. For example, set goals for five years and 10 years as well as more immediate goals. These investing goals give you the ability to more effectively guide your overall spending and financing.
Frequently Asked Questions
What are the benefits of a 6-month CD?
Six-month CDs provide a source of security for funds during a shorter period. CDs allow individuals to more effectively safeguard investments for by preserving the initial deposit from loss. The period of six months is much shorter than other CD term lengths, which boosts the level of flexibility that people have with their funds.
What is the difference between a traditional savings account and a CD?
A CD is commonly viewed as a type of savings account, but it should not be confused with a traditional savings account. A CD usually allows only one initial deposit. That deposit will then be inaccessible for a predetermined period. For example, 6-month CDs require that a deposit remains untouched until it reaches maturity. If you need the money before the maturity date, you have to pay early withdrawal fees. To compensate people for being unable to access funds, CDs frequently give customers higher interest rates than savings accounts.
Regular savings accountshave lower interest rates but provide more freedom. Typical savings accounts allow individuals to withdraw funds at will.
Overall, typical savings accounts and CDs have both potential drawbacks and benefits. Consider if locking away your funds or keeping them easily accessible will work best for you.
What’s the difference between CDs offered at banks and credit unions?
Banks and CDs offer similar products, but they are often called different names. For example, credit unions use the term share certificates while banks generally use the term CD. The two products are relatively similar, but function slightly differently. Bank CDs pay interest, and credit union certificates may pay interest and dividends.
What is the downside of a CD?
CDs are a safe way to protect your initial deposit. However, CDs can be limiting because you face penalties if you withdraw the money before maturity. The deposited funds are locked away for a previously determined amount of time. If you need to withdraw funds early then it’s highly probable that you will need to pay heavy early withdrawal fees. Such limitations could prove inconvenient for people that need to keep funds accessible. Only place funds into a CD that you will not need for an extended amount of time. Consider CDs a way to safeguard deposits but not as a method that will permit easy access funds.
Think about having a strong emergency fund before putting money into a CD. CDs are frequently considered an excellent way to save and invest funds if you have already grown your emergency savings.
What impacts CD rates?
Multiple factors such as the amount of your initial deposit, type of CD and the specific financial institution impact CD rates. The actual financial institution connected to the CD also impacts your rates because different institutions offer different rates. The APY rates at one institution have the potential to be somewhat higher than other institutions. In general, longer term lengths have increased APY rates.