How a CD helps make your money work for you.
08/31/2023
Find out what a CD is, how to use CDs to increase your savings, and discover how strategies like CD ladders can help you earn while taking advantage of the rising and falling interest rates in our market today.
Why use a CD?
CDs make your money work harder with a higher interest rate than a normal savings account. CDs can be used to save up for anything: a downpayment on a house, a new car, school expenses, you name it. It locks in your money for a set period of time ranging from 3 months to 5 years. Usually, the longer the money is in the account, the higher the interest rate. With today’s competitive CD market, there are a ton of high interest earning CDs available with shorter terms.
A CD is less risky than an investment in the stock market, so you can be sure you are going to get your money back, plus interest. A CD also locks in your rate, unlike a Money Market account, so as market conditions change, the amount of interest you earn will remain the same until the CD matures.
CD interest rates do not change based on how much money you put into a CD, although there may be a minimum balance requirement to open one. At MembersAlliance, it is only $500 which is on the lower end. At some banks the limit can be as high as $2,500 or more. If you want to start growing your money a Save to Win CD is a good way to start. It gives you the CD experience, but only has a $25 minimum balance and it enters your name into drawings for cash prizes every $25 you deposit.
Longer terms vs shorter terms. Which is better?
Shorter terms allow you to earn interest faster and frees up your money to take advantage of possible new interest earning increases. Longer terms can lock in a good rate for a greater amount of time and can help you ride out lower interest rate earning seasons.
The number one consideration when it comes to length of terms is: When will you need the money? CDs have early withdrawal penalties which can eat into the money you are trying to earn, so make sure you do not lock in money that you may need before the CD matures.
Usually the longer you invest, the more interest you will earn. For example, if you invest $10,000 in a 7 month CD at 5%APY you will earn an estimated $288. If you invest the same amount in a 60 month CD that earns only 2%APY, you will earn $1,043 because it allowed for more time for interest to build up. You could keep reinvesting in 7 month CDs to earn the same amount faster, but there is no guarantee you will get the same 5%APY rate after the 7 months are up. That is where CD ladders come in to get the best of both worlds.
A CD ladder is a strategy that separates money between a couple CDs with different maturity dates so a portion of your money is freed up periodically while the rest is still building interest. For example, to create a CD ladder you might divide $10,000 between a 6 month CD, a 12 month CD, and a 18 month CD. If you put $3,000 into a 6 month CD, after that 6 months that $3,000 plus the interest earned will be free to reinvest or spend while the other $7,000 is still at work building interest in other two CDs for another 6 and 12 months. This way when higher rates, meaning CDs that earn more for your money, are available, you can jump on the opportunity.