5 CD Tips for Beginners

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Certificates of deposit (CDs) have gained popularity recently because many of them pay high yields, including some that are above 5%.

But even though CDs can be a great place to put your money, they can be confusing for beginners. Here are a few tips to help you better understand them if you're just starting with CDs.

1. Ask yourself what you want your money to accomplish

The first thing you should consider is why you want to put money into a CD. This is important, because knowing your goal for your money is necessary to make the right decision. For example, ask yourself if you're trying to make money or preserve what you currently have.

Even a high-yield CD isn't the best place for your money if you want that money to grow for your retirement. In that case, putting your money in the stock market, with its historical average annual rate of return of 10%, is a better investment.

However, if you just want some of your money to grow so its value outpaces inflation, a CD is a great choice. Also, if you're risk-averse and want a low-risk place to keep some of your money, a CD is a great option.

2. Comparison shop for the APY

There are many places you can invest in a CD. Your bank likely offers CDs, but it might not have the best annual percentage yield (APY). That's why it's a good idea to shop around for the best CD rates.

I bank at Wells Fargo, which currently has a 1-year CD APY of just 1.50%. In contrast, many online banks will pay an APY above 4.00% right now.

If you have $3,000 to put in a CD for one year and chose a CD issue that paid 4.50%, you'd earn about $135 in interest over that time. In contrast, the CD paying 1.50% would earn you only $45 in interest.

3. Check the early withdrawal fee and minimum deposit amount

Many CDs have a required minimum deposit, so double-check before you choose one. Some will have as low as $0 deposit minimum, while others may be several thousand dollars. There's no use wasting time finding a CD with the right APY if the minimum deposit is more than you can afford.

Additionally, you should know that if you withdraw your money early, you'll likely have to pay a fee. For CDs with maturity terms longer than 24 months, you'll typically pay a penalty fee of 180 days of simple interest on any money you withdraw early. For CDs with terms of 24 months or shorter, the penalty fee is usually 90 days of simple interest on the amount withdrawn early.

For example, if you put $3,000 into a 3-year CD paying 4.50% but take all of it out after one year, you'll likely pay a penalty of about $66. Each CD issuer sets its own penalty terms, so make sure you look closely at the fees before you invest your money.

4. Start with a short-term CD and a little bit of money

Putting your money into a 6-month CD might be a good choice if you're just starting out with CDs. It'll give you a chance to see how you feel about having your money locked up for a period of time, without having to wait too long to get it back.

Additionally, it may be best to start with a small amount of money for your first CD. Doing so will help you learn how it feels to have your money in a CD, compared to having it invested in stocks or in a savings account.

It's worth mentioning that any money you think you might need for emergencies or other expenses should not be placed in a CD.

5. If you're interested, you may want to act soon

CD rates are influenced by the federal funds rate set by the Federal Reserve. When the Fed began raising interest rates to tamp down inflation a couple years ago, CD rates began to rise.

Many economists expect the Fed to cut interest rates later this year, with multiple cuts possible before the end of the year. If this happens, CD issuers will likely lower the interest rate they pay for CDs.

So if you're interested in CDs and want to snag the highest rates, now is an excellent time to do so.

CDs don't have to be intimidating, and understanding a little more about them should give you the confidence to put money into one. But if you're still not ready, you can always opt for a high-yield savings account. These will let your money earn interest, without the early withdrawal penalties that CDs have.

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