When it comes to good interest-bearing deposit accounts, certificate of deposit CDs can serve as a reliable savings option for individuals looking to secure their money in an instrument that offers minimal risk along with the possibility of substantial gains. CD interest rates can vary widely, but if you shop around, you can easily find CDs in a wide range of terms offering over 4% APY currently.
In exchange for those high CD rates, you agree to hold your funds in the account for a set term , potentially ranging from several months to as long as 10 years. Should you require accessing your funds prematurely, you might incur an early withdrawal penalty .
Given the restrictive CD withdrawal rules, it's important to weigh the potential CD returns along with the risks and understand when it makes sense to use a CD and when it doesn't. We spoke with three experts who share when a certificate of deposit is a good idea, despite the restrictions and when it's not.
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When CD restrictions are worth it
Below are several situations where returning CDs might be beneficial despite the early withdrawal fee.
You're setting money aside for a particular objective.
One significant benefit of using a certificate of deposit (CD) for savings is the flexibility in selecting different term lengths. You might opt for anywhere between six months up to one year, extend it to two years, or even go as far as five years—ultimately having control over which option suits your needs best. This makes CDs particularly suitable if you're planning towards achieving a financial objective at some point in the future.
“CDs can be particularly useful for individuals who may have an upcoming expense, such as one scheduled within a year or two, and wish to avoid being enticed to use those funds,” explains Shana Hennigan, the chief business officer at Raisin—a platform enabling customers to explore various banking institutions and their savings offerings from a single location.
If you keep all your savings in one place, it might tempt you to use them unintentionally and divert attention from your objectives. A certificate of deposit (CD) serves as an excellent option for setting aside money meant for significant future plans.
"Be it a wedding, vacation, car maintenance, or home repairs, various certificates of deposit could be quite beneficial in those situations," explains Kelley Leix, who serves as the client deposit services manager at Merchants Bank.
Compare the top CD offerings available online at present. .
The penalty for withdrawing from the CD is solely based on interest.
When you save money with a certificate of deposit, you decide on a CD term commitment And agree not to access your funds. Should you require those funds due to unforeseen circumstances, the conditions of your account may result in a CD early withdrawal penalty.
While a minimum penalty is in place, there isn't a maximum amount that can be charged. It's at the discretion of your financial institution.
"The first thing I would advise is make sure you find out exactly what the penalties are. For instance, if you're only losing the interest you've earned, then I would say that that's good…What you want to see in a certificate is that the financial institution cannot take your principal. So I would look for penalties that are only interest earned up to a certain number of days of interest," says Carma Peters, president and CEO at Michigan Legacy Credit Union.
When CD restrictions may not be worth it
The limitations associated with CDs result in reduced accessibility and flexibility. Even though the potential for CD returns might justify these constraints under certain circumstances, there are instances when dealing with them may not be worthwhile.
If you lack an emergency fund
A certificate of deposit is an excellent savings tool besides a high-yield savings account If you haven’t established an emergency fund, it’s not advisable to tie down your funds for a fixed period using a CD.
“If you recognize that liquidity is necessary for you, and you aim to establish an emergency fund where immediate access to your money is crucial, then a certificate of deposit might not be the right option,” explains Hennagan.
Should you require the finances promptly
A CD might not be the best vehicle if you're on the fence about whether you may or may not need the funds soon.
"If you know you're going to need the money, then I would either look for a shorter term certificate or maybe a different vehicle with a higher rate to get a return if you know you're going to need that money in the near future," says Peters.
Where can you locate the top-rated compact discs?
Once you contrast possible CD yields against the withdrawal limitations, you can craft a well-informed choice about whether it makes sense or not. Should you choose to proceed, this is how you can locate the optimal CDs.
- Compare CD APYs. If you're looking for where to purchase a CD, begin by exploring CD interest rates Be mindful of your financial institutions. Keep in mind that online banks as well as local credit unions might provide better options. competitive rates Leix further points out that certain banks provide varying interest rates according to tiered balances; however, this practice isn’t universal among banking institutions.
- Look at minimum deposits. Many banks offering certificates of deposit (CDs) mandate a minimum investment, typically ranging between $500 and $2,500. However, certain institutions might not impose any minimum requirements or set them much higher.
- Review CD terms. Every financial institution provides different options. The duration of CDs may differ. from a few months to a couple of years and in between.
- Verify the consequences of an early withdrawal fee. Before you open a CD account, confirm the early withdrawal penalty so you know what you're getting into. Any CD withdrawals before the term can trigger a penalty.
Peters recommends ensuring that the financial institution where you plan to open a certificate of deposit (CD) is insured. The Federal Deposit Insurance Corporation (FDIC) covers numerous bank deposits, whereas the National Credit Union Administration (NCUA) protects credit union accounts—up to $250,000 for each depositor per account.
The bottom line
Saving funds in a certificate of deposit might be wise if you've set clear objectives and established an emergency reserve. Because of the early withdrawal penalties associated with CDs, individuals should carefully consider their decision regarding the chosen term length. Should you proceed, ensure you comprehend the possible outcomes and decide ahead of time whether you intend to renew the CD upon maturity or withdraw the amount.
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