Certificate of deposits (CDs) are savings vehicles offered by banks and credit unions. CD interest rates are typically higher than that of savings accounts and money market accounts, often rendering CDs more attractive than either of the aforementioned options.
CDs have a fixed maturity date and specific fixed interest rate, and once a CD matures, the entire principal amount, as well as earned interest, can be withdrawn.
One drawback to a CD is that you’re required to keep your money in the account for a specified period of time, which makes CDs a highly illiquid form of investment. (Savings accounts are a more liquid interest-bearing type of account.)
How do I know if a CD is right for me?
If you’re a disciplined individual, have a set deposit amount and a specific long-term goal, CDs might be perfect for you.
However, one of the most important things to know is that a CD is a savings vehicle, not an ATM machine. If you’re one of those individuals who treats your savings account like a checking account, it’s important to realize that money (in both of those accounts, to be clear) are actually supposed to be reserved for access later.
Financial experts say that anywhere from three to six months of emergency expenses should be covered in case of a job loss, debilitating health occurrence, etc. and a CD could be a good vehicle for you to make that happen. The benefits to CDs for an emergency fund are:
- They are safe from market risk.
- They’re interest bearing.
The only downfall to putting your funds in a CD is that they’re not as easily accessible as they would be in a savings account or money market fund. So, if you’re a freelance writer, for example, and you suddenly can’t find work, you may have to look into breaking into your CD early.
How do CDs work?
CDs are a time deposit. In order to receive a higher interest rate, you agree to keep your money “locked up.” When you choose a CD, you’ll also choose the amount of time you’d like the bank or credit union to hold onto your money. This is called the term, and common terms are 6,12, 18 and 60 months. There are other terms available, too.
Typically, longer terms equate to a higher interest rate, but it’s important to decide if your needs will allow a longer term.
At the end of the term, the CD “matures” and your bank or credit union will notify you. If you choose to do nothing, the bank or credit union will put you in another CD just like the last one that had matured. If you’d like to put the money in a different CD or you’d like the money in a savings or checking account, you’ll need to notify your bank or credit union.
Types of CDs
Here are three different types of CDs to choose from:
- Liquid CDs are CDs that allow you to take your money out (without paying early withdrawal penalties) before the CD matures. Liquid CDs are also known as “risk-free” or “breakable” CDs.
- Bump-up CDs are CDs that allow you to take advantage of rising interest rates with a one-time option to “bump up” the interest rate. The point of using a bump-up CD is a hope that interest rates will rise, and if you do the bump-up option, it’s important to find out how many times you can bump up, and if you must extend a CD’s term with every bump-up.
- Brokered CDs are simply CDs that mean your financial advisor, broker, financial planner, financial consultant–whomever– combs the marketplace (thus offering you more options for different types of CDs) than if you were to just walk into one bank, which would only offer you the CDs they had in that specific bank.
Can I get my money out early?
It’s definitely possible to get your money out of a CD early, though you’ll have to evaluate whether it’s beneficial for you to do so or not. Banks charge penalties when you cash in your CD early. Some good examples of needing to get money out of your CD early include:
- You’ve found an investment with a higher return and approximately the same amount of risk.
- The penalty isn’t huge to take out your CD.
- You’re having a financial emergency.
- You need the money for something important, such as the down payment for a house.
The earlier you withdraw, the less interest you’ll earn. CD withdrawal rules and conditions are not the same at every bank or credit union, so be sure you’re aware of what the bank or credit union will charge if something rises to the surface.
CD laddering combines both short term and long term savings with more frequent access to a portion of your money. Essentially, you would divide the amount of money you’d like to invest into CDs, all with different maturity dates.
Ally Bank has a great tool for calculating CD ladders, and it involves choosing your ladder and also your total initial amount to calculate a total of estimated earnings.
How do I get a CD?
You’ll be able to access a CD through your bank or credit union, and just about every brick-and-mortar locale has one. CDs are also increasingly offered by online banks as well.
It’s important to do your research, and Benzinga has put five great options in your basket. The following are the top five CD rates, all based on APY.
See Benzinga’s What is APY? for more information about APY.
Best CDs by APY
For more information about APY and how it’s calculated, check out Benzinga’s What is APY? The current best CDs by APY list the best CDs interest rates, but bear in mind that most of them are long-term CDs, rather than short term CDs. For example, Capital One’s six-month CD has only a 0.40% interest rate. See the rates and terms below:
Capital One 360 CD: 2.65% APY
Five-year online (60 months) CDs through Capital One’s 360 CDs bear an interest rate of 2.65%.
Marcus by Goldman Sachs: 2.60% APY
Marcus by Goldman Sachs offers a CD calculator that can help you determine how much money you’ll have after investing in a CD. There’s no minimum deposit to open. Marcus by Goldman Sachs’ 2.60% APY is for a five-year CD.
Synchrony Bank: 2.50% APY
You’ll get a choice of terms from 30-60 months and a $2,000 minimum opening deposit for putting your money in a CD through Synchrony. The 2.50% APY is for five-year CDs.
Ally Bank: 2.50% APY
Ally Bank’s 2.50% high yield CD requires a $25,000 minimum deposit and a 60 month (five-year) commitment.
Discover: 2.45% APY
Discover’s 10-year CD gets you a 2.45% APY, and you can start saving with as little as $2,500.
On a side note, you may note that the interest rates proposed here, while the highest APY of all CDs to date, aren’t as high as you’d like. While it’s true that in the grand scheme of all the investment possibilities, CDs rank on the low end. They’re constantly battling inflation; however, if you’re looking for a low-risk investment that beats savings accounts or money markets (especially to protect that emergency fund) then CDs really can have a place in your overall investment strategy.