We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation. Learn more.
- PERSONAL FINANCE NEWS
- CD NEWS
Simonapilolla / Getty Images
KEY TAKEAWAYS
As a personal finance writer who's covered CDs and other savings vehicles for almost 10 years, in addition to holding various CDs over the years, here are my pro tips on using these useful savings tools to boost your earnings while minimizing any risks.
- Tip 1. Decide if It’s a Good Time to Buy
- Tip 2. Determine How Much to Deposit
- Tip 3. Decide How Long to Commit
- Tip 4. Shop Around for a Top Rate With an Acceptable Penalty
- Tip 5. Consider Multiple Smaller CDs Instead of One Big One
- Tip 6. Put a Reminder on Your Calendar to Avoid Auto-Renewal
The full article continues below these offers from our partners.
Tip 1. Decide if It’s a Good Time to Buy
Savings accounts are a good place for earning whatever today's going rate is. But certificates of deposit (CDs) are structured differently. Whatever the rate is when you open the CD, that's what you'll earn for the CD's full maturity term.
This makes CDs most useful when a drop in general interest rates looks likely because it means you can lock in a rate today that's higher than what's expected in the future. On the flip side, if it seems U.S. interest rates will probably rise, your locked CD rate could prove inferior down the road.
That's why my first step in deciding whether to open a CD is always thinking about whether it's a good time for interest rates. The way to do that is by paying attention to what the Federal Reserve is doing with its federal funds rate, which directly influences what banks and credit unions pay on customer deposits. By simply reading the headline news on whether the Fed is in a period of raising or lowering rates, you can gauge where CD rates are likely headed.
TODAY'S FORECAST FOR CD RATES
Today's CDs are paying close to peak rates thanks to the Fed's aggressive 2022-2023 rate-hike campaign to tame decades-high inflation. Though the Fed has not raised its benchmark rate since July, it has maintained the federal funds rate at its highest level since 2001 for 10 months now. As a result, rates are about the highest they've ever been since I bought my first CD more than 20 years ago.
With inflation cooling somewhat, it's expected the Fed will start lowering rates at some point—which will nudge new CD rates lower. But with recent inflation proving stubborn, the Fed has said it's not ready to begin rate cuts, and financial markets are betting it will be September or November before we see the first decrease.
While this means CD rates could stay stable for months, it also suggests broader interest rates will likely be lower by 2025—making CDs with terms of 1 year or longer a smart move while today's rates are still high.
Tip 2. Determine How Much to Deposit
Because CDs are designed to keep your money on deposit until the end of their term—without any withdrawals—you don't want to put money in a CD that you know you'll need at a certain point in the future or might need in an emergency.
The smartest strategy is to decide how to split your savings between a liquid account, like a high-yield savings account, and a CD. Decide on a set reserve amount that will go into a savings account, so that if you find you need to withdraw funds for something unexpected, you can easily do so from savings. Then think about whether you're confident you can live without the rest for a while and designate that amount as your CD savings.
Tip 3. Decide How Long to Commit
Next, you'll want to think hard about how long you can live without the funds you're committing to a CD. Is this surplus savings you want to keep until your imminent retirement in five years or before you have to pay a child's tuition bill in three years? Or if you're younger, is this money you're not sure how you'll use, making you unwilling to commit for more than six to 12 months?
Another common scenario is a saver accumulating funds for a down payment on a home purchase they know is a year or two away. This was my story: I first dipped my toe in the waters of CD buying when my husband and I were saving up for our first house and wanted to grow those funds as quickly as possible.
Each person's financial situation is different, as are our plans for the future. The key is to spend time thinking through what you know you can expect in your financial scenario down the road. Then decide which typical CD length best fits that bill. The most common CD terms range from 3 months to 5 years.
Besides your personal timeline, it's also smart to consider the interest rate timing issues discussed above. If it looks like interest rates are likely to come down over the next two to three years—as is the case right now—then the longer you can lock in one of today's CD rates, the better.
Tip 4. Shop Around for a Top Rate With an Acceptable Penalty
Though fourth in sequence, my No. 1 tip is always to shop around! The CD rates different banks and credit unions pay vary wildly, so never assume the rate your current bank offers is a reasonable return. In fact, banking giants like Chase, Bank of America, and Wells Fargo pay close to zero on savings accounts and most of their CDs.
Fortunately, opening a CD at a top-paying institution doesn't mean changing where you do your primary banking. That's because CDs are exceptionally easy to hold at an outside institution, since you'll rarely interact with your CD account. In fact, this is my standard practice: I hold my checking account at my long-time bank, a high-yield savings account or two elsewhere, and any CDs I have at whatever institutions had the most attractive offers for my needs at the time I was CD shopping. (Usually, I will end my relationship with the CD institution after the term ends and I move my funds elsewhere.)
Over 200 banks and credit unions offer nationwide CDs, but we make it easy for you to identify the best CD rates for whatever term you're looking for. Every business day, we rank the top annual percentage yields (APYs) for nationwide CDs offered by federally insured institutions. We also publish rankings for specific terms, such as the best 1-year CDs, 2-year CDs, and so forth.
WHY SMALL BANKS AND CREDIT UNIONS ARE JUST AS SAFE
If opening a CD at a smaller institution feels riskier, rest assured that it isn't. FDIC insurance applies equally to all member banks, no matter their size. The same holds true for credit unions—if it's a member of the NCUA, it offers the same federal insurance protection on your deposits that FDIC coverage provides.
Once you've landed on one or more contenders for your CD deposit, it's critical to find out the institution's policy on how they'll calculate an early withdrawal penalty if you have to cash out early. As with interest rates, early withdrawal penalties vary dramatically, with some charging just a few months of forfeited interest, while others have harsh policies that can eat into your CD's principal. So before signing on the dotted line and transferring funds, be sure you've checked that the CD's penalty policy is reasonable.
Tip 5. Consider Multiple Smaller CDs Instead of One Big One
Let's say you've decided you have $20,000 to sock away in a CD. There's no reason you have to put all $20,000 in the same CD. In fact, there are various benefits to spreading that deposit amount among several certificates.
First, if you instead open four certificates of $5,000 each, and you encounter a financial emergency that requires you to access some of your CD funds, you may be able to cash in just one CD to handle the issue and leave the other three $5,000 certificates intact.
I did this the first time I bought CDs. I wasn't entirely sure I'd be able to hold the full amount until maturity, so instead of putting $30,000 in house savings in a single certificate, I opened five $6,000 certificates at the same bank. In the end, I kept them all for their full term, but felt safer knowing I could have cashed in just one or two if I really needed to.
A second reason you could opt to split your CD funds is to watch where rates go. Maybe you invest $10,000 right now, so you're sure to get one of today's top rates while you can. But then you could hold the other $10,000 for another investment in a month or two, in case a great new CD offer emerges during that time.
Lastly, you can vary your time commitment by spreading your deposit out over certificates of different lengths. For instance, you could put $5,000 in a top-paying 6-month CD, $5,000 in a 1-year CD, $5,000 in an 18-month CD, and the last $5,000 in a 2-year CD. This enables you to score on several different rate locks while making some of your savings accessible every six months.
Tip 6. Put a Reminder on Your Calendar to Avoid Auto-Renewal
This tip is important after you've made your CD deposit. Let's say you've opened a 1-year certificate. If you don't provide other instructions before the year is up, the bank or credit union holding your CD will in most cases roll your balance right into another 1-year CD at whatever their current rate is.
Letting this happen is almost always a bad idea. For one, you may not want to commit for another full year (and longer CDs will roll over into same-length CDs, meaning a three-year commitment could turn into a six-year commitment).
Second, we discussed how critical it is to shop around. The roll-over rate from your existing CD institution is unlikely to be a top nationwide rate. So by letting it auto-renew, you've not only forfeited your opportunity to access your funds but also your chance to reinvest the funds for one of today's top CD rates.
To avoid this fate, I always put a reminder on my calendar three to four weeks before any CD maturity date. This alerts me to check that I've received a paper or electronic notification from my CD institution on how to tell them what to do with the maturing CD funds (many institutions send this out one month before the maturity date). If I haven't seen a notification or letter, my calendar reminder prompts me to contact the institution.
The reminder also gets me thinking about what to do with my CD funds. Should I start shopping for a new CD? Do I want to just put the money in a savings account for now? Do I want the funds transferred to my checking account because I have a big purchase coming up? These are the things you can spend time thinking about if you give yourself a reminder with a few weeks' cushion.
DON'T WANT A NEW CD? CONSIDER A HIGH-YIELD SAVINGS ACCOUNT
Though their rates aren't fixed like a CD, opening one of the top-paying options in our daily ranking of the best high-yield savings accounts can give you a good place to stash your cash if you don't want to roll it over into a new CD commitment. Today's top accounts pay as much as 5.55% and offer you the ability to withdraw funds as you like.
How We Find the Best Savings and CD Rates
Every business day, Googlawi tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.