CDs have a lot to offer the safety- and yield-minded saver. Virtually the only catch is that if you need the money before the CD matures, you'll pay a penalty that could eliminate the advantage you thought you were getting from the higher rate. For that reason, CDs are good for people looking for maximum yields, but who will not need their cash unexpectedly.
You'll get a higher-than-passbook rate of interest in return for your commitment to leave the money deposited for a specified time, commonly from a minimum of a month or so to a maximum of five years. The longer you commit your money -- and, in some cases, the more money you commit -- the more you earn.
The interest rate is usually fixed but can vary based on market conditions, such as the rise or fall of the prime rate. Minimum deposits are often $500 to $1,000, though the best rates may require higher minimums.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How to shop for CDs
By spending just a half-hour or so shopping for the best rates, you can probably earn an extra one to two percentage points on your next certificate of deposit. With a $25,000 CD, that's an extra $250 to $500 earned in one year and from $1,275 to $2,600 over five years.
Buy from a bank. Start by calling local banks and thrifts to compare rates. For each CD maturity, ask for the;
- Annual percentage rate (or APR, which reflects the compounding of interest).
- Minimum deposit amount.
- The penalty for early withdrawal.
- How you'll be notified when the CD matures.
You should also make sure deposits are insured by the Federal Deposit Insurance Corp. FDIC insures deposits of up to $100,000 per person, per type of account (such as savings, CD and IRA) per bank. For example, you could have a $100,000 CD in your name, keep $50,000 in a demand deposit in a joint account in your and your spouse's names and be fully insured up to $150,000. (For details, visit the FDIC's Web site.)
Next, broaden your search. Going national could reward you with a yield of up to two percentage points more. If a deposit is insured by the FDIC, you're as safe with a CD offered by a bank 2,000 miles away as one around the corner. Bankrate.com tracks the most generous CD yields offered by banks and thrifts around the country. (Search the latest rates or research the bank, thrift or credit union for stability.)
Buy from a Broker. A brokerage firm can generally offer you an above-average yield on a federally insured CD. Because issuing banks pay a fee to brokers who parcel out their CDs this way, the customer usually doesn't have to pay a commission. And because brokerage firms that do this sort of packaging usually maintain an active secondary market for their CDs, you can often sell them back before maturity without paying the penalty a bank or s&l would charge for early withdrawal. But the privilege of cashing in your CD early with no penalty may come at a price.
If interest rates rise between the day you purchase the CD and the day you cash it in early, you won't get back as much as you paid for it. (On the other hand, if rates have fallen, you should get more.) This is because a CD in the secondary market is in many respects a short-term bond, and the usual relationship between bond values and market rates will be at work: When interest rates rise, the value of outstanding bonds falls; when rates fall, bond values rise.
Skip the Gimmicks
Some banks and s&l's have devised yield-boosting gimmicks to attract new money. The "bump-up" CD and market-indexed CD are popular ones.
Bump-ups generally start you at a lower rate but promise to raise it if interest rates rise during the term of your CD. However, they are usually crafted to favor the bank and you'd typically be better off if you lock in at the higher rate. Market-indexed CDs are tied to the performance of the overall stock market and essentially expose you to market risks without delivering all the potential rewards. You'd be better off putting your cash into regular CDs and your long-term savings into a stock-index mutual fund.
-
Take Charge of Retirement Spending With This Simple StrategyTo make sure you're in control of retirement spending, rather than the other way around, allocate funds to just three purposes: income, protection and legacy.
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
Will lower mortgage rates bring relief to the housing market?The Kiplinger Letter As mortgage rates slowly come down here's what to expect in the housing market over the next year or so.
-
Car Prices Are Finally Coming DownThe Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
-
New Graduates Navigate a Challenging Labor MarketThe Kiplinger Letter Things are getting tough for new graduates. Job offers are drying up and the jobless rate is increasing. Are internships the answer?
-
When's the Best Time to Buy a Domestic Flight? The Kiplinger LetterThe Kiplinger Letter A new study by CheapAir.com has crunched the numbers.
-
Woes Continue for Banking Sector: The Kiplinger LetterThe Kiplinger Letter Regional bank stocks were hammered recently after news of New York Community Bank’s big fourth-quarter loss.
-
Anxious Flyers Take Note: The Kiplinger LetterThe Kiplinger Letter Whether it's the routes to avoid that have the most turbulence or the safest airline, we've got you covered.
-
The Auto Industry Outlook for 2024The Kiplinger Letter Here's what to expect in the auto industry this year. If you’re in the market for a car it won’t be quite as daunting as it was during the pandemic and after.
-
Two More Travel Trends for 2024: The Kiplinger LetterThe Kiplinger Letter As the world gets moving again, two more travel trends to consider: Solo cruising and airline passengers with loaded guns.
