5 CD Tips for Beginners

Certificates of deposit (CDs) have become popular recently because they pay high yields, many in excess of 5%.

But while CDs can be a great place to invest your money, they can be confusing for beginners. If you’re starting with CDs, here are some tips to help you understand them better.

1. Ask yourself what you want to achieve with your money.

The first thing to consider is why You want to put money into CDs. This is important because knowing your money goals is necessary to make good decisions. For example, ask yourself whether you are trying to make money or preserve what you have.

If you’re looking to save for retirement, high-capacity CDs aren’t the best place for your money either. If so, investing your money in the stock market, which has historically averaged a 10% annual return, is a better investment.

But if you want some of your money to grow so its value outstrips inflation, CDs are a good option. CDs are also a good choice if you are risk averse and want a low-risk place to store some of your money.

2. APY comparison shop

There are many places you can invest in CDs. Your bank will likely offer CDs, but they may not offer the highest annual percentage yield (APY). That’s why it’s a good idea to shop around to find the best CD price.

I currently bank at Wells Fargo, where the 1-year CD APY is only 1.50%. In contrast, many online banks will currently pay an APY of 4.00% or more.

If you have $3,000 to store in CDs for a year and you choose a CD issue that pays 4.50%, you’ll earn about $135 in interest over that period. In contrast, a CD paying 1.50% would only pay $45 in interest.

3. Check early withdrawal fees and minimum deposit amount

Many CDs require a minimum deposit, so double-check before making your choice. Some may have a minimum deposit of as little as $0, while others may have thousands of dollars. If the minimum deposit is more than you can afford, there’s no need to waste time looking for a CD with the right APY.

Also, be aware that you will likely have to pay a fee if you withdraw your money early. For CDs with maturities longer than 24 months, you will typically pay a 180-day simple interest penalty on the amount you withdraw early. For CDs with a term of 24 months or less, the penalty is typically 90 days of simple interest on the early withdrawal amount.

For example, if you put $3,000 into a three-year CD paying 4.50% interest and then pay it all off after one year, you’d pay a penalty of about $66. Each CD issuer has its own set of penalty terms, so take a close look at the fees before investing your money.

4. Start with a short-term CD and some money

If you’re just starting out with CDs, putting money into six months’ worth of CDs may be a good option. It gives you a chance to see how you feel about tying up your money for a period of time without having to wait too long to get it back.

Also, if you’re going to make your first CD, it’s best to start with a small amount of money. Doing so will help you learn what it feels like to keep your money in a CD compared to investing it in stocks or a savings account.

It’s worth mentioning that you shouldn’t put money into a CD if you think you might need it for an emergency or other expenses.

5. If you are interested, you better act quickly.

CD interest rates are influenced by the federal funds rate set by the Federal Reserve. CD rates started rising a few years ago when the Federal Reserve began raising interest rates to curb inflation.

Many economists expect the Federal Reserve to cut interest rates later this year, with multiple cuts possible before the end of the year. When this happens, CD issuers will likely lower the interest rates they pay on CDs.

So if you’re interested in CDs and want to get the highest price, now is a great opportunity to do so.

CDs don’t have to be intimidating, and understanding a little more about them will give you the confidence to invest your money in them. But if you’re not ready yet, you can always opt for a high-yield savings account. This allows you to earn interest on your money without an early withdrawal penalty like a CD.

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

Many people are missing out on guaranteed returns by letting their money languish in large bank savings accounts that pay little to no interest. we chose Best Online Savings Accounts You could earn 11 times the national average savings account interest rate. Click here Find the best-in-class accounts included in our list of the best savings accounts of 2024.