Using CDs for Your Savings

The advantages and drawbacks of putting your money in a certificate of deposit.

10/09/2018

Using CDs for Your SavingsFrom savings accounts and money market accounts to stuffing cash into a jar in the cabinet or beneath the mattress, there are a wide variety of ways to save your money. These options offer varying advantages and drawbacks, but what they all have in common is the idea that you can withdraw your money as soon as you wish. If you have funds that you want to squirrel away without the temptation to dip into them, consider putting the money into a certificate of deposit (CD).

What is a certificate of deposit?

According to NerdWallet’s Tony Armstrong, a CD is a kind of savings account that typically offers a fixed interest rate and fixed maturity date. Insured by the Federal Deposit Insurance Corp. for up to $250,000, CDs are considered extremely low-risk savings alternatives. The advantage to leaving the money in your CD for a full term, which Armstrong says typically ranges from three months to ten years, is that it will accrue interest over that period, offering a significant return on your investment.

Saundra Latham, contributor at The Simple Dollar, writes different types of CDs are worth considering. A traditional CD is the most common variety and offers fixed interest rates. There is also a bump-up CD, which allows you to opt into a higher interest rate if one becomes available during your term. If you have a larger amount of money to put away — think six figures or more — a jumbo CD pays out a higher interest rate than the traditional option.

When a CD won’t work

A CD requires the full term to pass before you can withdraw funds (without paying a fee), so it might not be a sound option if it is your only means of savings. CDs are attractive because they tend to offer higher interest rates than savings and money market accounts, but they don’t offer the same flexibility when it comes to making sporadic withdrawals for emergency situations. Margarette Burnette of NerdWallet suggests a high-yield savings account might be a preferable alternative if you aren’t positive you could go for a fixed term without the money.

How to maximize your CDs

The “laddering” technique is a common approach to getting the most out of a CD. The Wall Street Journal’s how-to guide on CDs puts it as such: “Let’s say you want to invest $15,000. By laddering, you would invest $5,000 in a one-year CD, $5,000 in a two-year CD and $5,000 in a three-year CD. Then, each time one of the three CDs matures, you would either take the cash or re-invest it in another three-year CD to keep your ladder in place.”

This strategy enables you to continually collect interest and opt into higher interest rates if they are available at the close of a term. If you keep this method going continuously, you will allow yourself the option of having a chunk of your CD savings at your disposal every year. This way, you can decide whether you need the money for an emergency or investment opportunity while the other CDs in your portfolio continue to accrue interest.

Investing in CDs is a safe, solid financial decision if you have the patience to bear it out. To determine whether a CD is right for you, talk to your personal banker at North Shore Bank to learn more about the risks and rewards, and our current CD offers.

Related Blog Posts

Six Important Steps Before Buying a Home

Preparing for the home-buying process Full story...

How to Create a Food Budget

Frugal grocery-buying strategies to minimize monthly expenses. Full story...

Racine Neighborhood Watch Fundraiser [Photos]

View pictures from this great event. Full story...