How to Use Certificates of Deposit (CDs) to Grow Your Savings

Are you looking for a safe and reliable way to grow your savings? Certificates of Deposit (CDs) might be exactly what you're looking for. They're a popular choice for individuals who value security and predictable returns. Let’s dive into how you can use CDs to boost your savings.

What are Certificates of Deposit (CDs)?

A CD is a savings account that holds a fixed amount of money for a specific period – the “term” – which can range from a few months to several years. In exchange for locking up your funds for the term, the bank or credit union pays you a fixed interest rate. Crucially, you cannot withdraw your money without incurring a penalty, which usually involves forfeiting some or all of the interest earned during the term.

Why Choose CDs?

Safety and Security: CDs are FDIC insured (up to $250,000 per depositor, per insured bank), making them a very safe place to keep your money.
Predictable Returns: With a CD, you know exactly what your interest rate will be for the entire term, providing a stable and predictable return on your savings.
Rising Interest Rates: Currently (as of March 15, 2021), interest rates on CDs are significantly higher than those offered on traditional savings accounts. This makes CDs an especially attractive option for maximizing your earnings.

Types of CDs

Traditional CDs: These CDs hold your money for a fixed term and offer a fixed interest rate.
Brokered CDs: Offered through brokerage firms, these can sometimes offer slightly higher rates than traditional CDs, and may provide more flexibility.
High-Yield CDs: Offered by online banks, these typically boast higher interest rates than traditional CDs. While higher rates are attractive, be sure to compare fees and terms carefully.
Bump-Up CDs: These CDs allow you to request a rate increase if interest rates rise during the term.
Step-Up CDs: Interest rates increase at predetermined intervals during the CD’s term.

How to Calculate Potential Earnings

Here’s a simple example:

Let’s say you deposit $10,000 into a 3-year CD with an Annual Percentage Yield (APY) of 3.5%.

Year 1: $350 (3.5% of$ 10,000)
Year 2: $367.50 (3.5% of$ 10,000)
Year 3: $386.25 (3.5% of$ 10,000)

Total Interest Earned: $1,103.75

Important Considerations When Choosing a CD

Term Length: Longer terms typically offer higher interest rates, but you're locked in for the entire period.
Interest Rate (APY): Compare the Annual Percentage Yield (APY) across different CD offers. APY reflects the true annual rate of return, considering the compounding effect.
Early Withdrawal Penalties: Understand the penalties for withdrawing your money before the CD matures.
Bank Reputation and Fees: Research the bank’s reputation and check for any fees associated with the CD.

Resources to Explore

Bankrate CD Rates: https://www.bankrate.com/cd-rates/
NerdWallet CD Rates: https://www.nerdwallet.com/cd-rates

Disclaimer: This information is for general knowledge and informational purposes only, and does not constitute investment advice. It is essential to consult with a qualified financial advisor before making any financial decisions.*