Six Essential Tips to Help You Select the Best-value CD

The start of 2024 has been favorable for savers because the Federal Reserve hasn’t yet reduced interest rates. But that won’t continue indefinitely. For the remainder of the year, experts predict that the Fed will lower interest rates three times. It’s important to act quickly if you’re considering opening a CD to secure the best rate before CD rates start to decline.

Reasons for CD investments

One of the most risk-free places to keep your money is in CDs. The following is a summary of some of the factors that may make opening one a good fit for your financial goals:

• Return guaranteed: Standard CD rates are set. CDs provide a steady return in contrast to the erratic stock market. Since you’ll know exactly how much you’ll make and when you can withdraw the funds, this makes budgeting and planning simple.
• Greater earning potential compared to other savings accounts: CDs have the potential to yield higher returns than other deposit accounts like money market and savings accounts.
• Restrict your spending: Early withdrawal penalties on CDs can be a useful tool in helping you resist the urge to spend. You will hesitate to take out the money because you don’t want to lose your interest earnings.
• There’s no need to choose just one: By laddering CDs, you can establish a reliable source of income for yourself.
• Security: CDs held in federally insured credit unions and banks are protected.

As the Fed raised interest rates, average CD rates rose gradually before leveling off. Even though CD rates aren’t expected to rise as much, the best CDs still pay more than 5% and exceed inflation.

Tips for selecting the top CD

It’s wise to consider your future and establish your goals before making any financial decisions. It’s important to consider your financial goals, but it’s just as crucial to be ready for emergencies. Make sure your emergency fund has enough money in it, usually three to six months’ worth of living expenses. Additionally, don’t put that money in a CD. It would be better off in a high-yield savings account that you can access whenever you need to.

1. Select the appropriate term length

Generally, CDs require you to invest your money for a term, which is a set length of time. You consent to refrain from taking money out during the term.

CD terms come in a variety of lengths, from one month to five years. A few banks even provide CDs for ten years. Are you putting money aside for a trip, a down payment on a house, or the purchase of an automobile? To select a CD with the ideal term, ascertain when you will require that money.

2. Look for the best rates

The goal of any investment product is to maximize your money’s growth. When it comes to CD rates, the national averages are low in comparison to what you can find elsewhere. For instance, the most recent data from the FDIC shows that the national average yield on a one-year CD is a mere 1.81 percent APY. However, some banks pay an annual percentage yield (APY) of at least 5%.

Because they do not have the overhead of maintaining branches as traditional brick-and-mortar banks do, online banks frequently offer better rates.

3. Select a CD with an affordable minimum deposit

The amount of money needed to open a certificate of deposit varies amongst financial institutions.

However, a lot of banks demand that you deposit at least $500 or $1,000. Others demand five thousand dollars or more. The kind of CD you open may determine the minimum deposit needed. Typically, deposits for jumbo CDs are $100,000.

4. Verify any early withdrawal penalties

Customers who take money out of their CD accounts before the CD matures are penalized by banks. Go through the fine print in your account agreement to learn more about these charges.

The amount of interest associated with early withdrawal penalties can vary greatly, ranging from 60 days to 365 days or more. Generally speaking, penalty fees increase with the length of the CD.

5. Select the appropriate CD type

There are many different types of CDs, so before you lock in your money, compare your options.

For example, you can ignore the fourth step in this checklist if you use a no-penalty CD, also known as a liquid CD. If you choose this option, you won’t be penalized if you take your money out before the term is up. A no-penalty CD can be a wise choice if you anticipate needing the money before it matures or if you want the freedom to withdraw it without incurring penalties to pursue better investment opportunities. The APY will most likely be less than it is on a traditional CD as a trade-off.

Consider an add-on CD, which allows you to make additional deposits into the account at any time during the term if you anticipate receiving a nice bonus at work. These are rather uncommon, though, and their yields are typically lower than those of regular, penalty-free CDs. An alternative that often has lower yields but offers tax benefits is IRA CDs.

Step up and give a bump Although CDs differ slightly, both products allow you to increase your yield if rates rise. Furthermore, given the current expectation that rates will decline, neither of these is a particularly good choice.

6. Verify that the bank or credit union you are doing business with is federally insured

Choose only financial institutions that are covered by the National Credit Union Association (NCUA) Share Insurance Fund or the Federal Deposit Insurance Corp. (FDIC) when making purchases. Your money would be safe even if your credit union or bank failed.

Up to $250,000 is covered by federal deposit insurance for each depositor, FDIC bank, and account ownership category. To provide customers with large deposits with additional insurance coverage, certain banks offer a service that distributes funds among a network of insured banks.

This tool can be used to locate banks that are FDIC members or credit unions that are NCUA members.

Conclusion

If you can lock in the money for a specific term, a certificate of deposit (CD) can be a safe, high-yielding investment. Choose a term that you are comfortable with, compare rates, and choose a federally insured bank or credit union to get the best value for your money.