In the banking world, CDs have been a staple for decades. Differing from both savings and checking accounts, CDs are designed for infrequent transactions, as most people use CDs to store large sums of money that can earn interest.
While it can be tempting to deposit your money in the highest yielding account, comparing CD rates for higher yields as well as evaluating these four tips can help you find the right new account:
1. The Opportunity Cost
The commitment involved in a CD can pose a problem if you base your choice solely on the interest rate. If you lock into a CD and the rates either stay the same or fall during the term, you are fine. But, if CD rates begin to climb in the months or years after, unless you want to break out of your contract, which usually costs a penalty of several months in interest, you will be stuck with your current CD rate while other investors take advantage of higher rates.
Instead of choosing the account with the highest CD rate, consider instead what direction you expect interest rates to take in the future. If the foreseeable future seems like interest rates will remain stable or fall slightly, locking into a long-term contract might make sense. But if the rates look unsteady, or like they might begin to rise, keeping your money in short term accounts might be the wisest course of action.
2. The Penalty Potential
Because it can be difficult to determine the future of interest rates, if you do lock into a long-term account and interest rates begin to rise, there are still some options available. If your CD has a mild penalty for early withdrawal, there is the possibility you could break into your CD and come out ahead, especially if you secure a new CD with higher interest rates.
When choosing a CD account, consider the withdrawal penalties. Finding an account with a small penalty might offer you the flexibility you will need if you need to break into your CD.
3. CD Ladder
A CD ladder consists of multiple CDs with varied maturity dates, giving you the opportunity to earn maximum interest while maintaining liquidity. CD ladders offer penalty-free access to a portion of your savings while the rest accrues interest.
4. Unconventional CDs
While most people prefer traditional CDs, there are some unconventional investments that can offer both risk and reward. Some banks offer a raise-your-rate CD, which is a special type of CD that allows you to increase your interest rate one or more times during the term. Or, an indexed CDs rate moves with a benchmark indicator instead of having a fixed rate. While these types of CDs can pay off, they are a bit of a gamble, as the lack of stability can actually hurt your account, especially if interest rates go down instead of up.
Before jumping into a long-term contract, do your research ahead of time to find the best account.