Using CDs for Your Savings

From savings accounts and money market accounts to keeping cash in a jar under the mattress, there are many ways to save your money. These options come with their own pros and cons, but what they all have in common is the ability to withdraw your funds whenever you want. If you have money you want to set aside without the temptation to dip into it, a certificate of deposit (CD) might be a good option.

What is a Certificate of Deposit?

A CD is a type of savings account that offers a fixed interest rate and a fixed maturity date. Insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000, CDs are considered extremely low-risk savings options. The benefit of leaving your money in a CD for the full term, which typically ranges from three months to five years, is that it earns interest over time, providing a solid return on your investment.

There are various types of CDs to consider. A traditional CD offers fixed interest rates, while a variable-rate CD adjusts based on the market rate. 

When a CD Won’t Work

One thing to keep in mind is that a CD requires you to leave your funds in the account until the full term is up. If you need to withdraw early, you could face hefty penalties. This makes CDs a less ideal option if you need more flexibility with your savings. While they generally offer higher interest rates than savings or money market accounts, they don’t provide the same liquidity. Consider a high-yield savings account as a better alternative if you might need access to your funds sooner.

A CD also may not suit you if you’re seeking higher-risk, higher-reward investments. While CDs are a reliable and safe addition to your portfolio, they don’t offer the same potential for bigger payouts that more aggressive investment options can provide.

How to Maximize Your CDs

One way to get the most out of a CD is through a strategy known as “laddering.” The Wall Street Journal describes it like this: If you want to invest $15,000, you could divide it into three parts: $5,000 in a one-year CD, $5,000 in a two-year CD, and $5,000 in a three-year CD. Each time one of these CDs matures, you can either take the cash or reinvest it in another three-year CD.

Laddering allows you to consistently earn interest and gives you the flexibility to take advantage of higher interest rates when they become available. By continuing this strategy, you'll have a portion of your savings accessible each year, allowing you to decide whether to use the funds for an emergency or reinvest them while your other CDs continue to earn interest.

Investing in CDs is a safe, reliable financial decision if you’re willing to wait it out. To determine if a CD fits your goals, talk to your financial advisor to learn more about the potential risks and rewards.

Explore our competitive cd rates

Check out our current rates and open a CD by visiting your local Five Star Bank branch today.