3 Steps You Can Take to Make sure You Never Regret Opening a CD

If you want to earn interest on your money beyond what you can pay off in your savings account, opening a CD may be a good option. Because CDs require you to deposit funds for a predetermined period of time, CD interest rates are typically higher than savings account rates.

But remember, in exchange for receiving a higher interest rate, you are committing to keep your money in the bank until the CD matures. If you cash out a CD before its maturity date, you typically risk being charged an early withdrawal penalty, the exact amount of which will vary depending on the bank and the length of the CD.

That’s why it’s important to think carefully when opening a CD. You don’t want to open one just to cash out your money early and kick yourself out for it. But if you take these steps, you may not regret your decision to invest your money in CDs.

1. Make sure your bank is FDIC insured

If you have money tied up in a CD and the bank goes bankrupt, meaning the bank is not FDIC insured, you could be in trouble. With FDIC insurance, your deposits are protected as long as they do not exceed $250,000. If you have a joint CD, the limit increases to $500,000.

Now, if you shop for CD rates online, you’ll notice that some of the most competitive offers are from banks you’ve never heard of. However, you can check here to see if the lesser-known bank you’re considering opening an account with is FDIC insured.

2. Make sure your emergency fund is complete

Unplanned costs can arise at any time. Unfortunately, if your money is tied up in a CD, you can’t use it to pay for car repairs unless you want to risk a penalty.

Before opening a CD, make sure you have everything in place and an emergency fund available. Make sure you have at least three months of essential expenses covered. And keep your emergency fund outside of a CD so you can access that cash at any time.

Anticipate any short-term costs you may incur in this context and set aside non-CD expenses for these. If a close friend recently got engaged and you’re talking about a destination wedding, it might be a good idea to put that extra $1,000 into regular savings instead of a CD in case you need to pay it off sooner. Expected to be a flight and a hotel.

3. Ladder installation

Stacking your CDs can be a good way to avoid early withdrawal penalties. Because you can free up your money at other times.

Several different approaches can be used for laddering. First, you can divide the money you want to keep into 3-month CDs, 6-month CDs, 9-month CDs, and 12-month CDs. This will ensure your funds are available every three months.

Another option? Put some of your money today into a 12-month CD. Wait three months, then put another part on a 12-month CD, and so on.

Why can I do this as opposed to the first approach? If a 12-month CD offers a more favorable interest rate than a short-term CD, you may benefit financially.

That means CD rates could fall this year if the Federal Reserve cuts interest rates. So the first approach might actually be better.

You don’t want to open a CD only to regret it later. Taking these steps before you leap will reduce the chances of you being dissatisfied with your decision.

This savings account is FDIC insured and can earn 11 times the bank’s earnings.

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