CD Investing: 5 Tips to Grow your Cash Safely
Point of Interest
A CD account is a great way to grow your money as it offers higher interest rates than traditional savings accounts, letting you maximize your savings if you can afford to let it sit for a while.
If you’re frustrated with low interest rates on your savings, it’s time to look for a better way to grow your money. The average savings account typically offers low interest rates of around 0.01% a year. For those looking for higher rates, certificates of deposit (CDs) are a great alternative to grow your savings.
CD investment might not be for everyone, and it’s very important to do your research to get the most out of a CD account. CDs are a secure and passive way to invest money and watch it grow over long periods of time. However, it’s important to fully understand how to invest in CDs, whether CD rates are going up and the key mistakes to avoid.
What is a CD?
A CD account is a type of investment and savings method designed to help grow your money in a passive, safe and risk-free way.
The method behind them is simple. CDs require you to deposit money and simply leave it alone for a predetermined length of time. This could be as short as six months but could span over several years. This means that if you sign up for a 1-year CD, you will need to let your money stay put for that year without any withdrawals.
The benefit of using a CD is that they typically offer higher rates of interest in return for you leaving your money alone. They are a great option for anyone frustrated with low-interest rates offered by traditional savings accounts. CDs are also a popular solution for those saving towards things such as a down payment on a house in a few years.
Not all CDs are the same though, so it’s important to shop around and do your research. Longer-term CDs generally pay more interest than shorter-term CDs will. Some CDs will even adjust the interest rate you earn over time, which makes it beneficial to leave your money in there for as long as possible.
While it is possible to withdraw money from a CD, there will be an early withdrawal penalty. This means if you need fast access to your money, a CD is not the best option for you, and a traditional savings account will be better suited.
How to best invest in a CD
As with any investment, there are strategies you can adopt to help your money grow further. The first step is to find a bank that offers CD investment accounts. This could be your current bank or even an entirely different one.
Find the best CD rates
It’s always best to do your research and look into several different options to get the best CD rates. While it sounds easier to save with the same bank your checking account is currently with, you could be missing out on much better rates elsewhere.
Don’t overlook online banks
Plenty of people are still cautious about online banks, but many are FDIC-insured these days to ensure the safety of your money. Online banks typically offer higher interest rates, which can help you to further maximize your savings.
Decide what to do after your CD matures
At the end of your CD term, your bank should contact you to explain your options. The options usually include letting the CD renew, buying a different CD, moving your money elsewhere or withdrawing your funds.
If you are happy to keep your money growing and don’t need it right away, it could be worth continuing your CD or finding another one with better rates. Check to see whether CD rates are going up since you first opened an account? Average CD interest rates may be much better than when you first started saving, so it’s important to know whether you can get a better rate elsewhere.
Alternatively, you could simply sign up for a shorter-term account if you know you will need to withdraw your money soon.
If you’re happy with your returns and need the money soon, then withdrawing the funds is your chance to finally enjoy your earnings.
What to avoid when investing in a CD
Like with any kind of long-term investment or savings account, there are some simple CD mistakes to avoid.
Choosing the wrong CD investment terms
Because your money will be locked away for a length of time, it’s important to carefully consider whether the length of the CD is right for you. Long-term CDs should only be used by those who can afford to keep their money locked away.
Not researching different CD rates
Each CD will offer slightly different terms and interest rates. That’s why it’s so important to shop around for the best rate.
Typically, long-term CDs will give you a better return, but you will have to wait longer to receive it. For example, many 60-month CD rates will offer interest rates of around 1.75%, whereas most 12-month long CD rates average at around 1.50% APY.
Putting all your savings in a CD
CD investment accounts probably shouldn’t be your only method of saving. There’s no telling how your financial circumstances can change, so having all your savings in a CD could be a big risk. Instead, be sure to keep some money aside for emergencies in an accessible savings account. Withdrawing early from a CD could come with some high withdrawal penalties.
Allowing your CD to renew automatically
When your CD matures, you will have several options. As many automatically renew, the danger of not acting means you could accidentally lock your money away again. Make sure you take action as soon as you can to avoid this. You may be able to find better rates elsewhere anyway.
The final word
The great thing about CDs is that they are a low-risk, passive way to grow your money. All they require is a bit of patience. If you can afford to let your money stay locked away for several years, you could get much better interest than with an average savings account.
Just be sure to do your research and check whether locking your money away is a good option for you. A good practice is to set up multiple CDs with varying terms — also known as a CD ladder. This gives you the option to access your money at different intervals rather than having it all tied up in one account.