Putting some of your money into a certificate of deposit (CD) can be an excellent and safe way to grow your money. Young investors may be especially drawn to CDs right now because of their high annual percentage yields (APYs), some of which are above 5%.
CDs aren’t complicated, but there are a few things you should know before investing your money in one. Here are three important things to remember when opening your first CD.
1. Start small
CDs come in all shapes and sizes. Some CDs only require a few hundred dollars to invest, while others may require thousands of dollars. Some have term periods of just a few months, while others require leaving your money in place for a few years.
When choosing your first CD, it’s best to start with one that has a short term and a low minimum amount required at opening. Why? Because you don’t yet know how you’ll feel about having your money locked up for a while.
How to do it: You may want to choose a 6-month CD with a minimum deposit of just $500. Some CDs pay 5%, earning you $12 in interest. Of course, that’s a meager amount, but if you’re just getting started with CDs, it might be a wise choice before you lock up too much of your cash.
2. Shop around for the best rate
If you’re interested in CDs, you’re probably already thinking about the best ways to grow your money. However, one mistake some new investors make is assuming that all CDs are the same.
The national average rate for a 12-month CD right now is about 1.76%, but you can get far more bang for your buck by shopping around. For example, many CDs you can sign up for online pay 5% or a little higher.
If you invested $5,000 in a 12-month CD with a 1.76% APY, you’d earn $88. But with a 5% rate, you’d make $250 off your investment.
How to do it: Compare CD rates online to find the best one. You can search for the term length you want and your preferred APY and even sort by the minimum deposit amount.
3. Understand the drawbacks of CDs
While CDs can be a great investment, they aren’t perfect for everyone. Some people may benefit more by putting their money into a high-yield savings account rather than a CD.
That’s because CDs charge early withdrawal penalties. The penalty amounts can vary, but in general, CD terms of two years or less charge 90 days of simple interest on the amount you withdraw. CDs with terms over two years charge an early withdrawal penalty of 180 days of simple interest.
Meanwhile, savings accounts don’t charge you when you take money out, and some have interest rates that match or exceed what CDs offer. Your money also isn’t locked into a savings account; you can access any portion of it at any time.
The benefit of choosing a CD over a savings account is that the interest rate can fluctuate with a savings account, while CD rates are guaranteed for the entire term. So if you open a CD with a high rate, you’ll keep earning at that same rate for the length of the CD.
How to do it: Determine why you want a CD and consider whether a high-yield savings account could be a better bet. If you want to earn a high interest rate but need access to your money for emergencies, then a savings account is probably a better option for you. But remember that the interest rate on a savings account is subject to change.
Investing in a CD can be a smart move for people of any age right now. Just keep in mind that it ties up your cash for a set period, so it might feel a bit restricting if you’re not used to that style of investing. But if you’ve got some money you won’t need for bills or unexpected expenses anytime soon, stashing it in a high-yield CD could be a great way to see it grow.
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