The rates for certificates of deposit are skyrocketing. Thanks to rising interest rates, some banks and credit unions are offering5% or higher APY for CDs. Those are some of the best rates in over a decade. (See some of the best CD rates you can get now here).
The certificate of deposit, which is a savings vehicles that pay a fixed amount of interest over a set period of time, is a smart idea for those looking for a less risky investment, but have “an appreciation for slightly higher rates than a bank account,” says Blaine Thiederman, a specialized financial planner for tech professionals.
Thiederman recommends clients invest at least $10,000 in a high-paying CD to get the most benefit. Put in any less, he says, and “the additional interest you get from the CD just doesn’t really pose enough of a benefit to justify it.” That said, you can invest in CDs with much less — some have minimums of about $1,000 for example — and still earn a decent amount. (See some of the best CD rates you can get now here).
Note that one downside to investing in CDs is that you won’t be able to access your money for a predetermined period of time without risking having to pay an early withdrawal penalty. Depending on the term you select, you may have to wait anywhere from six months to up to about five years to move your money without penalty.
Pros shared a few things to consider before you invest in a CD.
Ask yourself: Is a CD right for me?
The first thing you should consider is whether a CD is the right investment for you.
If you’re looking for a low risk investment that allows you to access your money at any time with no penalty, a money market account or high-yield savings account may be a better choice. “Money market rates are super high,” Carmen Alderete, financial advisor for Edward Jones says. “So many people have no idea that money markets are safe. You can put a good amount of money in it and it’s liquid.”
Some high-yield savings accounts are also paying more than 4.5% APY, and could be a better option if you think there’s a chance you could need your money sooner.
Think about when you’ll need your money
If you can part ways with your savings for a little while, consider how long you’d like to put your money in a CD. “Think about when you need the cash at the earliest,” Thiederman says. Then, select the term period that makes the most sense for your needs.
Alderete recommends making sure that you’ll have access to the money at least one month before you’ll need to use it.
Start socking away money now for a CD, if you go that route
Both Alderete and Thiederman advise taking stock of the money you’re spending right now and cutting down where you can. Canceling subscriptions you don’t use or purchasing cheaper items at the grocery store can make a big difference.
Next, think about how much money you can afford to put in savings each month and automate it, Alderete says. Work with your financial adviser to set up a regular autopay to your own accounts and that money will grow over time. Then start to increase that amount. (See the highest savings account rates here.)
It also helps to set financial goals for yourself, Alderete says. If you know that you want to use the money you’re saving for a vacation in 6 months, that will help motivate you to save. Putting aside enough money to get a good return on a CD, for example, could be a motivation to push you to save a little extra.
“It allows you the freedom to know that there is money earmarked for things that amplify your life and that motivates people to save,” she says.
Having a goal can help motivate you more, Alderete adds. CDs are a good option if you want to grow your cash over a shorter period of time; here are options with a 5% or higher APY.
“Your money should always be working while you sleep,” she says.