How to Make the Most of Your CD Account

If you have or are considering buying a certificate of deposit (CD), you’ll notice right away that some of the best interest rates on a CD are better than what you’d find on a savings account.  The bank is paying you a higher amount of interest on the CD in exchange for your agreement that you won’t withdraw the money until the maturity date.  Otherwise, you’ll pay a penalty (which could eat up some or all of your interest earned, and possibly your principal – which includes your original deposit amount).

Banks pay you this higher rate based on the certainty that they can loan your money out to others.  The difference in the rate you earn and the rate they loan the money at is how the bank stays in business.  Because this money is essentially “hands off”, you’ll be able to grow your savings at a faster rate with a CD than most any other type of banking product, including the traditional stand-by of savings accounts.

Concerned About Needing Access to Your Money in a Pinch?

One of the biggest concerns that customers have about CDs is being able to get to their money in case of an emergency or when they need the extra cash immediately.  As stated before, you’ll pay a penalty by withdrawing this money from your CD prior to the maturity date, so what many savvy customers do is called “CD laddering”.  Instead of investing the whole amount, say $5,000, in one CD, and keeping it for five years until the maturity date, you can break it up into 5 smaller CDs of $1,000 each, and “ladder” them at different terms (6 months, 1 year, 2 years, 3 years, 5 years).  While you can’t foresee when you might need the money, laddering a CD helps you plan for those times when you can either choose to withdraw your funds from your CD, or, if things are going well, reinvest them and continue earning at a competitive rate.

Getting the Best Rates for Your CDs

Obviously, the more money you deposit into a CD, the better bank rates on a CD account you’ll get in return.  Fortunately, there are plenty of websites online where you can comparison shop and find the best rates for different CD terms and amounts.  Oftentimes, you can buy a CD for as little as $1,000 with a term as little as six months.  Or you can deposit more and continue to grow your money over the course of several years.  It all depends on your timeframe and budgetary needs.

What to Do When the Maturity Date Rolls Around

CDs give you the benefit of compound interest, which means you’ll be earning interest on top of the stated rate that the bank is paying you.  This interest is usually added to your account every month.  When the maturity date rolls around, you can either withdraw the funds from the entire CD (interest and all) or roll them over into another CD for another length of time at whatever prevailing rate the bank gives you.  The important thing to remember is to act quickly if you want to withdraw your money.  Banks usually give you a window of 7 to 15 days (depending on the Terms & Conditions set forth by the bank) during which you’ll need to decide what to do.

After that, if you have not indicated your choice to the bank, the CD will be rolled over into a new CD at the same term as it was previously – at whatever rate is currently available for that deposit amount and time-frame.  Understanding the benefits and times to take action with your CD is important to making your money work harder for you.

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