By Fran O’Rourke – KeyBank Capital Region Market President
As you build wealth, getting your money to make money is an important step on the path to financial wellness. One tool that can help you get a higher return on your savings is a certificate of deposit or CD. A CD is a low-risk savings tool that earns interest over time in exchange for the owner leaving their money in the CD for a certain amount of time. Because of the time limit, or term, CDs typically have higher returns than savings accounts, but both are considered low risk.
What “Certificate of Deposit” (CD) Means
A CD guarantees a certain rate of interest. Each CD has a term that can range from a few months to several years. At the end of the term, you can take out your money along with the interest earned. Like savings accounts, CDs are usually insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
Here’s what to Look for When Opening a CD
Compare CD Rates
While CD interest rates are somewhat higher than those of checking or money market accounts, not all CD rates are the same. Start by comparing the annual percentage yields (APYs) for any CDs you’re thinking about opening. The APY tells you what percentage of your deposit you’ll earn in interest over the course of a year. As long as the other details, like the minimum deposit and term, work for you, choose the CD that pays the highest rate. There are also CDs that allow you to “step up” or “bump up” to a higher rate at some point during the term.
Check the Minimum Deposit
Different CDs have different requirements about the amount of money you need to put into the account. For many CDs, the minimum is a few thousand dollars, but there are even accounts that require tens of thousands of dollars. CDs with higher minimums often pay better rates. Before you decide on a CD, make sure you’re comfortable with the minimum deposit. Once money goes into a CD, it can’t be easily taken out. Make sure you have enough cash in your regular checking and savings accounts to cover an emergency expense.
Check the Length of the Term
If you withdraw money from your CD before the term is up, you’ll pay a fee. So choose a CD whose term is in line with your savings goals. If you’re saving up for a purchase you’re going to make in six months, for example, you’ll want a CD with a term of a few months rather than a year or more. But if you want to keep savings in a CD far into the future, try to find a CD with a longer term – they usually pay better rates than shorter-term CDs.
With a range of savings and investment vehicles available to you, the variety of CD options and their relative safety make them well worth considering. A bank CD is a federally insured, secure savings account that has a fixed interest rate for a fixed amount of time, called a term. CDs usually don’t have monthly fees, but do impose fees if funds are accessed before the term ends on the maturity date.
Possible CD fees
Unlike savings accounts, CDs don’t allow the owner to withdraw the principal (that’s the amount of the original deposit) without triggering an early withdrawal fee. Once the term ends, your CD has reached “maturity” and that money is yours. Until the maturity date is reached, you can usually only withdraw interest earned on the principal without a fee.
Should I open a CD?
You should open a CD when you know you won’t need to access your deposit until the term ends. CDs help you save on a schedule with low risk and a return you can plan for, all without the monthly fees you might get with a savings account.
You’ll be able to choose a long-term CD or short-term CD based on your own savings goals and timelines of your financial commitments.
Because many CDs earn higher interest than other savings accounts and give you a return you can count on, they are a secure, low-risk savings option. They’re a good choice when you know you can put your deposit aside and not access it until the term ends.
To take advantage of the highest interest rate, you’ll often need to lock away your deposit for a longer term. If you’re considering a shorter-term CD, you might be able to find a comparable interest rate from a traditional savings account and keep the access to your money.
Talk with your banker about how a CD might fit into your financial picture.
About the author: Fran O’Rourke is President of KeyBank’s Capital Region Market. She may be reached at either 518-257-8733 or [email protected].
Simple, Smart Ways to Build Your Savings
Many Americans have $1,000 or less in savings and say that building savings is a financial priority. And while getting started can feel overwhelming, it doesn’t have to be complicated. There are many simple ways to begin building your savings and developing financially healthy habits including:
Set up a savings account and consider taking on a “money-saving challenge” to help establish a pattern of regularly adding to your account. Here are a couple fun ideas to get you going.
Dollar-a-Day Challenge: One popular challenge is to save a dollar a day. It’s simple, yet powerful – you’ll not only start building a habit of saving, but you will also see how small amounts can add up. If you start today and commit to a year of saving, then you will have saved $365 by the end.
Weekly $ Saving Challenge: Start by putting a dollar into your savings account in the first week. Then, increase the amount to two dollars in week two, three dollars in week three, and so on. Over the course of one year, you will have contributed a hefty amount toward savings. If you start this week, then your savings will total nearly $1,400 by this time next year.
Make saving even easier with KeyBank’s EasyUp® which automatically shifts a small amount of money from your checking account into your savings account every time you use your KeyBank debit card.
This story appeared on page 4 of the July 26, 2023 print edition of the Spotlight