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If you’re looking to earn interest on your money beyond what a savings account will pay, then opening a CD could be a good bet. Because CDs require you to lock up your money for a preset period, CD rates are typically higher than savings account rates.
But remember, in exchange for that higher rate, you’re committing to keep your money in the bank until your CD comes due. If you cash out your CD before its maturity date, you’ll generally risk an early withdrawal penalty, the exact amount of which will depend on your bank and the length of your CD.
That’s why it’s important to think carefully about opening a CD. You don’t want to open one only to cash out your money early and kick yourself for it. But if you make these moves, you may not end up bemoaning your decision to put money into a CD.
1. Make sure your bank is FDIC insured
You could run into a hairy situation if you have money tied up in a CD and your bank goes under — that is, if your bank isn’t FDIC insured. With FDIC insurance, your deposit is protected provided it doesn’t exceed $250,000. And if you have a joint CD, that limit rises to $500,000.
Now, if you’re shopping around for CD rates online, you may find that some of the most competitive offers are from banks you’ve never heard of. But you can check here to see if a lesser-known bank you’re considering opening an account with is FDIC insured.
2. Make sure your emergency fund is complete
Unplanned expenses can pop up at any time. Unfortunately, if your money is tied up in a CD, you can’t use it to do things like pay for car repairs unless you want to risk a penalty.
Before you open a CD, make sure you’re all set as far as your emergency fund goes. At a minimum, make certain you’re covered for at least three months of essential bills. And make sure to keep your emergency fund outside of a CD so you can access that cash at any time.
Along these lines, try to anticipate any near-term expenses that might arise and set money aside for them outside of your CD. If a close friend of yours was recently engaged, and they’re talking about a destination wedding, you may want to take an extra $1,000 and put it into regular savings instead of a CD in case you end up having to shell out money sooner than expected for a flight and hotel.
3. Set up a ladder
Laddering your CDs can be a good way to avoid early withdrawal penalties. That’s because you’ll have money freeing up at different times.
You can take a couple of different approaches to laddering. First, you could take the money you’re looking to put away and split it up into a 3-month CD, 6-month CD, 9-month CD, and 12-month CD. This way, your funds will become available every three months.
Another option? Take a portion of your money and put it into a 12-month CD today. Wait three months, and then put another portion into a 12-month CD, and so forth.
Why might you do this, as opposed to the first approach? If 12-month CDs offer a more favorable interest rate than shorter-term ones, you might benefit financially.
That said, CD rates could fall this year if the Federal Reserve cuts interest rates. So because of that, the first approach might actually be preferable.
You don’t want to open a CD only to regret it after the fact. Take these steps before making that leap so you’re less likely to end up unhappy with your decision.
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