Deciding where to put your savings can be a bit of a task. Money market accounts and savings accounts have been the go-to option for many people for the longest time. However, they attract low-interest rates.
With CDs, you have the option of choosing between long-term, medium-term, and short-term CDs, all depending on how long you’re willing to leave your money locked up. To encourage discipline, you’ll pay early withdrawal fees should you withdraw before maturity.
Despite the March 2020 federal cut in rates, CDs still attract lucrative rates. In this article, we’ll take an in-depth look at CDs as a way of saving and building wealth. We’ll also point out some of the best CD rates for 15 months.
CDs work similarly to traditional savings accounts. Except that here, savers cant freely access their accounts and deposit or withdraw to their liking.
CD accounts enable users to lock in their funds for a specific period, usually called terms. They range from 3 months to 10 years, or more, depending on the financial institution in question.
Once a saver has chosen their preferred term, they are not allowed to add to the principal amount. They also shouldn’t withdraw before the maturity of the term. Doing so will see them paying a fine, otherwise called early withdrawal fees.
CDs are generally risk-free. You’re guaranteed returns upon maturity of your term.
Different financial institutions have come up with special CDs to make it more convenient for savers. Such include non- penalty CDs that allow savers to withdraw before maturity without charging them any fines.
Others include add-on CDs. These allow members to add on their original principal whenever they can for maximum returns.
CDs are also among the safest places to keep your cash and allow it to grow. The federal government insures up to $250,000 in individual accounts against possible institutional losses.
CD rates are compounded. And, the rate of compounding differs from one financial institution to another and depending on the present market’s national average. Specific institution’s rates are reflected on their APY.
The bank or credit union you’re saving with multiplies your principal amount by the present market average. The output is then added to your principal amount and all the accumulated funds given to you at the end of the term.
Financial institutions compound interest rates daily, quarterly, semi-annually, or annually. The more frequently an institution compounds your rates, the more you’ll earn as accumulated interest.
Therefore, for significant savings growth, prioritize institutions that compound interests daily.
Your principal amount will start earning interest right from the first day. This, therefore, maximizes your returns.
CDs come in different terms. They include short-term (1 to 12 months), Mid-term (2 to 4 years), and long-term (5+ years) CDs.
For CDs, the rule of the thumb is – the longer the term, the more you’ll earn in rates. Therefore, long-term CDs are best for significant money growth.
When choosing the right CD rate, you should consider two crucial factors – your financial goals and the current national average. Choosing the right institution is also a key determinant of how much you’ll earn.
The rate environment is also a key factor that many savers tend to overlook. For a rising rate environment, for instance, savers would best go for shorter terms to take advantage of the rates and grow their earnings significantly.
This is especially good for savers with short-term goals like purchasing a car, home improvement, or purchasing home appliances.
You cannot afford to go wrong with CD rates. For this reason, please seek advice from your lender or any financial expert on solid advice. That includes the financial institution that you’re looking to invest in CDs on.
You already know a lot about CDs, and choosing the best rates. It’s now time to pick a side between short-term and long-term CDs.
The first crucial aspect you want to consider is your cash needs. How soon will you need your invested cashback? How long can you be able to leave it untouched so it can attract interest?
If it’s not too long, then short-term CDs will serve you well. Choose a term of between 3, 6, or 12 months. If you are also looking to take advantage of a sudden rise in market rates, then short-term CDs are also your best shot.
Remember, short-term CDs attract the lowest penalties should you be tempted to make a withdrawal before the maturity of your term.
If short-term CDs don’t sound like what you need, then you can check out long-term CDs. These have a maturity period of between 5 to 10 years, or more depending on the financial institution in question.
Long-term CDs attract the highest yields. The financial institution you’ve invested with rewards your willingness to leave your cash with them for a long time. This makes it an excellent choice for those looking to grow their savings.
However, they attract the steepest early-withdrawal penalties. If anything, this should motivate you to wait till maturity to withdraw your funds.
So, what should you choose between short-term and long-term CDs?
Long-term CDs are a perfect choice for those who are willing to leave the cash locked for a long time. They are also good for those looking to grow their savings significantly.
These CDs will also be good for savers with long-term financial goals like buying a home or any assets.
Short-term CDs, on the other hand, are good for taking advantage of a market wave. These are also a perfect choice for those who can only lock their money for a short time.
Alternatively, you can choose to invest in both long-term and short-term CDs. This is an excellent way to grow your savings and your CD ladder. This way, you’ll hardly run out of cash since you’ll have multiple terms maturing from time to time.
Remember, CDs are taxable. Your returns will be taxed at the end of your term.
A good savings plan – CDs will help you save your money and instill discipline in you so you don’t easily withdraw it. The thought of paying penalties will help you stay determined and focused.
Lower rates – compared to other money markets such as bonds and securities, CDs attract lower yields.
Guaranteed returns – with CDs, unlike shares and other money market investments, you’re assured of your returns after a specific period. Nothing is a gamble and the financial institution works out your expected returns at the onset of your term and lets you know beforehand. And, this is regardless of the market conditions. You only have to remain compliant with your agreement.
Early withdrawal fees – You’ll be charged for withdrawing your money before maturity. This will normally cost you a couple of months’ worth of interest.
Your yields are locked – CDs are immune to a downward trend in the market rates. Your expected earnings are worked out using the present national average and remain the same throughout the term of your CDs.
Your funds are locked – funds stored in CDs cannot be withdrawn before maturity. They, therefore, can’t help in the case of an emergency. Since the rates are also locked, you’ll miss out on even better terms should there be a rise in the market rates.
CDs are fully secure – your principal amount and accumulated interests are completely safe. The federal government through the National Credit Union Administration (NCUA) and FDIC secures up to $250,000 in individual accounts in credit unions and banks respectively. The funds are protected against possible organizational changes such as restructuring that would otherwise threaten the safety of your funds.
The process of opening a CD account is similar to that of opening a traditional savings account. And, so are the minimum requirements.
The first step is usually finding a financial institution whose policies conform with your savings goals. Online banks and credit unions are usually the best shot. Don’t shy away from less-known institutions.
As long as they are federally-insured, you can invest with them. They usually have better terms to attract new customers. Lookout not only for the rates but additional incentives too.
Ensure your chosen bank or credit union has such CDs as add-on CDs and no-penalty CDs for extra convenience and higher yields.
After finding your desired institution, the next step should be getting familiar with its policies. Once that is done, you’ll then submit a formal application, basically a filled application form.
As a basic requirement, you have to be a legal resident of the United States. You must also have attained the legal age, usually 18 years during application.
Depending on the financial institution, you may need to prove the source of your income. For this, you’ll show your latest payslips or an acknowledgment from your employer.
For the self-employed, you can present your tax returns forms, usually for the previous 2 years.
For verification, you’ll present your bank or credit union with your ID, valid driving license, or travel passport. You’ll then be required to choose your preferred term and deposit your principal amount.
Please note that investing in CDs, through profitable, should be well-thought of. Before buying CDs, ensure you can go for 15 months without touching the money.
Further note that money meant for emergency or basic use such as paying medical bills or food shouldn’t be used to buy CDs.
No. As long as your institution is insured, you’re guaranteed the safety of your funds. If it’s a bank, ensure it’s insured by the FDIC. For a credit union, ensure it’s insured by the federal government through the National Credit Union Administration (NCUA). The federal government insures up to $250,000 in individual accounts.
Like in a typical CD account, your money will stay locked for 15 months. The financial institution, after the expiry of your term, will reward you with higher rates for trusting them with your money. All your accumulated interests will be added to your principal and given to you. you can choose to reinvest the money and buy a new term.
If CDs don’t conform with your financial goals, then traditional savings accounts could serve you well. Though not as high, your savings will earn interest, plus the account comes with lots of flexibility. Alternatively, you can also try money market accounts.
Yes, CD interests are taxable. And, most financial institutions will let you know beforehand how much you’re expected to pay. You’ll also be given Form 1099-INT detailing each year’s accumulated interests. Unless the accumulated interest is less than $10, the IRS stipulates that it is taxable.
This varies depending on the rates and level of access you need to your funds. With money market accounts, you’ll have endless access to your account, and funds. CDs, on the other hand, are locked, and you only access your funds after maturity. Compared to traditional savings accounts, CDs attract the highest yields. Money markets accounts take second place while traditional savings accounts come in last. Online high-yield savings accounts have, however, witnessed significant growth in rates.