How to Choose the Right CD Terms for Maximum Growth

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The whole point of a certificate of deposit (CD) is to grow your money. You agree to let the bank keep your money for a set period of time, and the bank agrees to pay you lots of interest. The bank gets to use the money to make other investments, and you get to generate some income without any fuss.

Well, ideally, anyway. To make the most of a CD, you need to make sure you're picking the right one in the first place. Here's what to consider.

Prioritize rates

The interest rate on a CD will determine how much money it makes. So, at the most fundamental level: To maximize your return, you need the highest interest rate you can get.

Most often, the highest rates will be from short-term CDs, those with maturities in the six-month to 12-month range. And I say "range," because though six-month and 12-month maturities are standard, many places offer promotional CDs with odd terms (seven, nine, or 11 months).

Promotional APRs can be lucrative, but limited

If your financial institution offers promotional CDs, they're usually worth checking out. Some of the absolute best CDs rates I've seen are promotional offers with an odd term.

The one thing to remember with promotional CDs is that the intro rate won't apply when the CD rolls over. (Typically, if you don't withdraw your funds when a CD matures, the money automatically rolls over into a new CD.)

You'll want to read the terms of the promotional CD carefully to figure out what rate and term will apply to the new CD.

Balance liquidity with stability

Another benefit to dealing with short-term CDs is that your money isn't tied up for years. For example, if you get a 5-year CD but have an emergency in the second year, you're going to forfeit a lot of interest income to pull that money out early.

However, the downside to a short-term CD is that you don't get to lock in your rate for as long. If you get a 12-month CD and rates go down during that year, you'll get a lower rate when your CD rolls over (or you reinvest) after the term ends.

There have been a lot of predictions about the Federal Reserve lowering rates in 2024. If this happens, yes, CD rates will likely go down as well. The question becomes: Will rates drop enough to make locking in your money worth it? That's harder to answer for anyone but yourself.

Laddering: Best of both worlds?

One popular method of managing CDs is called laddering. This is where you get multiple CDs with different maturity dates. You can set them up so that you have some portion of your funds maturing each month, quarter, or year, giving you year-round access to some amount of your savings.

As an example, suppose you have $10,000 to put into CDs. You could put it all into one 5-year CD, locking in your rate -- and your cash -- for a full five years. Alternatively, you could ladder the money by putting it into five different CDs:

• $2,000 into a 1-year CD
• $2,000 into a 2-year CD
• $2,000 into a 3-year CD
• $2,000 into a 4-year CD
• $2,000 into a 5-year CD

With the ladder, some of your money will mature every year over the next five years. As each CD matures, you can decide if you need the money for something else, or roll it over into a new CD.

When to skip CDs altogether

If the idea of tying up your money for even six months seems too long, don't open a CD. Find a competitive high-yield savings account instead. You can get nearly the same rates right now, and you'll have constant access to your money.

When managed wisely, CDs can be a safe, reliable way to grow your savings. They aren't without potential pitfalls, however, so be sure to do a bit of research before diving in.

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