“Factors to Consider When Investing in a Certificate of Deposit”

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Factors to Consider When Deciding How Much Money to Put in a CD

When you have funds to set aside and grow, options beyond a regular savings account are available. One such option is a certificate of deposit (CD), which requires an upfront deposit that you typically can’t access until the term ends. Early withdrawals usually incur penalties.

While CDs lack the flexibility of other accounts, they offer higher interest rates and are safer than stock investments. The amount you should put in a CD depends on your financial position and goals, as well as the CD’s minimums and maximums. Here are some factors to consider when deciding how much money to put in a CD.

Your Financial Position

Traditional CDs require an upfront deposit that earns interest monthly at a designated annual percentage yield (APY). You can choose the term and deposit amount, which determine the APY offered. Terms can range from a few months to several years; typically, the longer the term, the higher the APY.

CDs are not liquid; withdrawing money before maturity usually means paying penalty fees. Consider how much money you can afford to lose access to temporarily. Ensure you have enough in your emergency fund or other accounts to avoid dipping into your CD prematurely.

CDs offer higher interest rates than savings accounts and guaranteed returns. They are insured deposit accounts, making your money safe. However, CDs grow existing savings through interest; you generally can’t contribute more after your initial deposit. If you want to add to your savings regularly, a savings account might be better. Some financial institutions offer add-on CDs, which allow deposits after the account opening, but these are less common.

When deciding how much to put in a CD, consider how much you can safely live without for the entire term. If you might need to withdraw early, it might not be worth the penalty fees. You could explore no-penalty CDs, which don’t charge fees for early withdrawals but offer a lower APY.

Your Financial Goals

Another important factor is your financial goals and their timeframes. CDs come in a range of short- and long-term options, from a few months to several years. Longer terms earn higher interest rates, but don’t choose solely based on the best APY. Consider the ideal term length given your savings goals and what you plan to use the money for.

For short-term goals like a vacation or wedding, a short-term CD of six months might be suitable. For mid-range goals like having a baby or renovating your home, consider CDs with terms of one to two years. For long-term goals like a house down payment, a CD for five or six years might be appropriate.

CD laddering is a strategy for greater flexibility. It involves taking out multiple CDs with varying terms to stagger their maturity, allowing regular access to your funds without sacrificing too much in higher yields.

Your Chosen CD’s Minimums

CDs require a minimum deposit to open the account, which will grow each month as it accrues interest. Some CDs, especially those with higher APYs, have higher minimums than others. Evaluate how much you can part with for your chosen term and choose a CD with a minimum amount your budget can afford.

If money is tight, start with a CD with a small minimum balance requirement, like $500, or a short term, such as six months. Both can offer greater flexibility if you might need that money soon or don’t have much to set aside. Just know that your interest earnings will be lower.

The CD’s Federal Insurance Maximums

CDs are insured by the federal government, like checking or savings accounts. In the rare case that your bank or credit union fails, federal insurance coverage from the Federal Deposit Insurance Corp. (FDIC) for banks or National Credit Union Administration (NCUA) for credit unions kicks in.

Both FDIC and NCUA automatically cover $250,000 per customer, per account type, per bank or credit union. If your total balance at a bank or credit union exceeds that amount, you would only be covered for $250,000 of it. Joint accounts and individual accounts are considered separate ownership types, so you’re insured for another $250,000 on accounts with the same bank or credit union if you own some of them jointly with someone else.

To avoid exceeding the insured limit, consider opening a CD at a different bank or credit union, or one where you keep less money. Alternatively, increase your coverage by making your CD a joint account with a trusted loved one.

Explore Other Savings Options

CDs can be excellent savings vehicles, especially if you’ve already saved up money and need a place to set it aside and let it grow safely. However, they may not be the best fit for those who don’t have much saved yet or want an account they can regularly deposit or withdraw from.

In those cases, consider a high-yield savings account, which doesn’t limit deposits and has fewer withdrawal limits. While interest rates on savings accounts may not be as high as CDs, yields are better than traditional savings accounts, and every little bit adds up.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with your financial goals and provide the best mortgage solutions.

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