As the Federal Reserve continues to raise its benchmark interest rate to fight inflation, many consumers are looking for ways to boost their savings for a variety of reasons. While some are simply looking for ways to save money on everyday expenses, others are considering what they should do with their current savings nest egg.
For those with money saved that is intended for long term uses, a Certificate of Deposit, or CD, has emerged as a popular and profitable savings option for those who are ready to stash money away and earn from it for a set amount of time.
Here’s how a CD works and may benefit your savings goals.
What is a CD?
A CD is an account with your bank that earns a fixed rate of interest for a specific term, or length of time. Generally, a CD’s term can range from 3-6 months to five years or more, depending on what CD terms your bank offers and how long of a commitment you want to make.
This commitment is an important factor to consider, as unlike traditional savings accounts or money markets, a CD requires that you leave the money in the account for the full term. This commitment enables banks to offer a higher interest rate, and in return you earn more money on your investment.
And because it is fixed and guaranteed at the rate you open the CD with, including being insured by the FDIC up to $250,000, a CD opened at a FDIC-insured bank is risk-free.
When should you consider a CD?
Most experts agree that you should have 6-12 months of expenses put away for an emergency fund. Then, if you have excess savings that you won’t have a short term need for, it may be a good time to consider a CD.
This decision also depends on your life stage. Are you planning to buy a home, vehicle or have a vacation planned within the next few months? If so, you may want to wait on opening a CD.
If your savings goals and needs are in a stage where you can put money away in a CD and let it mature for the full term, then now is a great time to act and take advantage of higher CD rates. Even if you are preparing for a larger purchase several months from now, there are still options that can benefit you financially by opening a CD now that has a moderate term with a favorable rate, providing a financial bump to your house or car down payment, home renovation or dream vacation.
CDs versus other investments
Because CDs are FDIC-insured up to $250,000 and have a fixed rate and term, their guaranteed returns provide an advantage over more volatile investments like stock or mutual funds. These other investments can yield greater returns than a CD, so it is important to weigh your risk appetite and short- and long-term saving and investing goals to create a mix that works for you.
This mix should include easy access to emergency funds and savings and investing products that balance risk and return. Speak with your banker about your options for CDs and how they fit within your savings plan.
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