Traditional savings accounts and the money market are common ways of saving money. However, the growth of your money on these avenues isn’t guaranteed. And, when it happens, it does so at a very slow rate.
CDs, however, are different. They are an excellent way to not only save but significantly grow your money, too. Plus, unlike the other forms of savings and money market investments, CDs have guaranteed returns.
Here’s a chance to put your money somewhere secure. In this article, we’ll get you started with certificates of deposit and point you to the lenders with the best CD rates for 18 months.
Certificates of deposit are similar to traditional savings accounts. Except for the fact that with CDs, savers don’t have free access to their savings anytime, they wish to deposit or withdraw funds.
Certificates of deposits will lock your savings for a defined period, otherwise called terms. CD terms range from 3 months to over 10 years. But, that largely depends on the financial institution you’re saving with.
After choosing your preferred CD term, you’ll then add in your principal amount. Each financial institution has a set minimum amount a saver must deposit into a CD account.
You’re not allowed to withdraw before the maturity of your term. Doing so will have you paying an early withdrawal fee.
With CDs, you’re guaranteed returns. They are generally risk-free. You only have to leave your savings untouched till maturity and you’ll receive back your principal amount and the accumulated interests.
For savers’ convenience, some financial institutions have introduced special CDs. Such include non-penalty CDs, allowing savers to withdraw at their convenience before maturity without being charged early withdrawal fees.
Add-on CDs also allow savers to continue adding funds to their original principal to maximize returns.
CDs, like we earlier noted, are totally safe. Your funds are federally-insured, keeping up to $250,000 in individual accounts safe.
CD rates are compounded differently from one financial institution to another and based on the market average at the time of compounding. You’ll know what an institution offers as its interest rate by looking at its APY.
Financial institutions work this out by multiplying your principal amount by the current market average. The resulting amount is then added to your original principal amount and paid to you upon maturity of your term.
The frequency of compounding interests varies from one institution to another. While some compound daily, others monthly, quarterly, semi-annually, and annually.
For interests, the rule of the thumb is – the more frequently an institution computes its rates, the higher you’ll earn. Hence, you should go for institutions that compound interests daily to maximize your returns.
With CDs, savers can choose between short-term CDs – 1 to 12 months, mid-term CDs – 2 to 4 years, and long-term CDs – 5 years and above.
Long-term CDs have, for the longest time, always attracted higher rates than its mid-term and short-term counterparts. If you are looking for significant savings growth, then long-term CDs will serve you right.
The current national average and your financial goals are the main factors to consider when choosing a CD rate and term. Making the right choice here will determine how much you earn at the end of your chosen term.
You should not overlook the rate environment. Determine if yours is a rising or falling rate environment. If it’s the former, go for shorter terms to take advantage of the rates and grow your savings significantly.
This will be an excellent choice if you have short-term goals like home improvement, purchasing households, or a car.
Any missteps with CDs can have you missing out on profitable ventures. As such, be sure to seek financial advice from your chosen financial institution and industry experts. Ensure you’re adequately informed before investing in CDs.
Take your time to shop around for suitable lenders with the best rates and friendly policies and those that conform with your savings and general financial goals.
Since we’ve already covered what Certificates of deposit are, the available terms, and how you can choose the best rates, let’s help you choose between long-term and short-term CDs.
Before making that choice, what are your immediate and future cash needs? How soon are you looking to have your returns? Knowing this will help you project how long you can leave your funds untouched.
If you’ll need your cashback sooner, then short-term CDs will work well with you. And, you can choose a term between 3 to 12 months. These can also be perfect for someone looking to take advantage of a rise in the market rates.
Again, short-term CDs attract the lowest early-withdrawal penalties. This will work to your advantage should you choose to withdraw your funds before maturity.
If short-term CDs don’t align with your financial goals, then you can give long-term CDs a shot. These mature in a period of between 5 and 10 years, or more.
Long-term CDs are accompanied by high yields; the highest rates you can hit with CDs. A saver is basically being rewarded for their commitment.
That makes it an excellent shot for those looking for significant growth for their savings. However, long-term CDs attract the highest penalties. This is meant to motivate you to leave your funds untouched till maturity.
So, which path should you take between short-term and long-term CDs?
Long-term CDs work well with savers looking to keep their savings untouched for over 5 years. These are savers looking to grow their savings significantly to help them meet long-term financial goals like funding a business or purchasing an asset.
Short-term CDs are good for short-term financial goals, mostly taking advantage of a rise in the market value. If you are looking to have your invested funds back in a short time, then locking them in short-term CDs will suffice.
If you still find it hard choosing between long-term and short-term CDs, then you can as well invest in both of them. This is called CD laddering.
Building your CD ladder will see you having CDs with different maturity terms. Hence, you’ll hardly go without cash. And, you’ll also fully take advantage of rising market rates and high yields with long-term CDs.
When investing in multiple CDs, do it with different financial institutions. This is especially essential for those looking to invest amounts higher than $250,000. This way, you’ll have all your cash fully insured by the federal government.
Please note that upon maturity of your funds, your bank or financial institution will notify you. failure to claim will have the financial institution reinvesting it in a new term. You should only allow this to happen if you don’t have immediate cash needs.
Also, note that you shouldn’t invest cash for immediate needs on Certificates of Deposit. The same applies to funds meant for emergency needs. This will save you from the losses incurred during early withdrawal.
A good way of savings – investing in CDs is an excellent way of savings. Plus, it’ll also help you stay disciplined so you don’t easily withdraw your cash like you would in a traditional savings account. Just knowing you’ll pay penalties is enough to keep you on toes.
Lower rates – short term CDs tend to attract lower rates. Generally, CDs tend to attract lower yields than the money market.
Guaranteed returns – investing in CDs is not a gamble. You’re assured of your returns. This is unlike the money markets and shares where you could suffer significant losses. Upon maturity of your chosen CD term, you’ll receive your funds regardless of the market conditions. You only have to comply with the terms of your agreement with the financial institution. Plus, you’ll know your expected yield at the onset of your agreement.
Penalties – You’ll be charged early withdrawal fees should you withdraw your funds before maturity. This is costly, especially for 18 months CDs. Unlike CDs, with traditional savings accounts, you can deposit and withdraw anytime.
Not affected by market trends – CD savings are locked according to the present market average and remain that way through to the end of the term. Your funds are, therefore, immune to the possible decline in the market rates. This way, you’ll avoid the possible losses associated with the drop in market rates.
Savings are locked – funds invested on CDs are not available for withdrawal before maturity. They, therefore cannot come to your aid in case of an emergency. The locked rates will also work to your disadvantage. Should there be an increase in the market rates, you’ll miss out on them
Not affected by market trends – CD savings are locked according to the present market average and remain that way through to the end of the term. Your funds are, therefore, immune to the possible decline in the market rates. This way, you’ll avoid the possible losses associated with the drop in market rates Fully secured – Funds invested on CDs are totally secured. The federal government insures up to $250,000 in individual accounts against institutional risks. It does so through the National Credit Union Administration for funds in credit unions and FIDC for banks. Therefore, organizational changes such as restructuring will in no way compromise the safety of your funds.
The process and requirements for opening and running a CD account are similar to those of traditional savings accounts. These requirements differ from one financial institution to another.
The basic requirement among most lenders, however, is that you must be a legal resident of the United States. You should also be of legal age, usually 18 years and above.
The lender verifies this by looking at your national ID, passport, or valid driving license.
Some institutions will also require that you prove the source of the funds you wish to invest in CDs.
If you’re employed, you can use your payslip or a letter from your employer. For the self-employed, tax returns for the previous two years and bank statements can bail you out.
Other institutions will also require that you be an existing customer for a certain period.
Once you’ve chosen your preferred bank or credit union, you’ll submit a formal application. You’ll fill in such details as your name, social security number, residential address, and details of the next of kin.
When shopping around for financial institutions, prioritize banks and credit unions. Go for ones with friendly policies. Preferably, ones with special CDs such as no-penalty and add-on CDs.
Don’t be afraid to invest in CDs with new and less-known financial institutions. These often have lucrative rates and friendly policies so they can attract customers.
As long an institution is federally-insured, you have nothing to worry about, especially when it comes to the safety of your funds.
Before investing in CDs, carefully think through the idea. Ensure you can leave the funds untouched for 18 months.
For our chosen list above, most financial institutions part with an APY of 0.65%, while the lowest is Marcus with 0.55%.
You’ll leave your funds untouched for 18 months. They’ll then earn interest right from the first day of investing to the last. Upon maturity, you’re paid your original principal amount and the accumulated interests.
Yes.Upon maturity, you’ll be taxed out of your accumulated interests.
Banks and credit unions have good rates and friendly policies. The table above has some of the best picks in the market.
Traditional savings accounts are a good place to put your money if CDs don’t work well with you. However, their rates are not high. But, they come with extra flexibility. Money market accounts could work, too.