If saving more money is on your list of financial resolutions for 2023, you may be wondering where to put your savings and the fastest way to grow your funds. For some savers, a certificate of deposit (CD) may be the way to go.
A CD is a type of savings account that pays a fixed rate of interest in exchange for putting money aside for a set period of time. After maturity, you will have access to the amount you deposited, as well as the interest you earned.
While this type of account doesn’t offer as much flexibility as other alternatives like traditional savings accounts or high-yield savings accounts, many banks and credit unions are sweetening the deal by increasing the APY offered on CDs.
CD rates go up and up— with one credit union offering a 6% 1-year CD
Savings rates have risen in the past year as the Federal Reserve has moved to raise interest rates in an effort to curb inflation.
When the Fed does not adjust CD rates, an increase in the federal funds rate can make borrowing more expensive and encourage consumers to save more. Many financial institutions take this as an opportunity to raise their savings rate.
In fact, Advantage Credit Union in Iowa is currently offering a 6% APY on a 1-year CD, which is one of the highest rates available today. While this rate is only available to certain Iowans and cannot be accessed online, it could signal a larger trend if the Fed continues to raise the federal funds rate in 2023.
3 reasons CDs might be right for you
There are several savings vehicles that you can choose to park your money in and choosing the right one will depend on a number of different factors. A CD may be the right account for you if:
- You save for a specific purpose with a clear timeline. CDs are offered in terms of just one month, or for 10 years. However, whatever term you choose, the same rules generally apply. You will not be able to touch the funds in the CD until your CD matures. Making an early withdrawal will more than likely incur a steep penalty. If you’re saving for a specific goal like buying a house or a vehicle and have a firm idea of when you’ll need the money, CDs can help you stay accountable to your savings goals.
- You already have money saved. While there are some CDs that allow you to add funds after you open them, most of the main funding happens when you open the CDs. This means that you should save a good amount—or at least the minimum amount needed to open your account—when you choose a CD.
- You have an emergency fund. Tapping into a CD before it matures can mean forfeiting some or all of the interest earned on the balance and potentially even part of the principal balance. When you lock money in a CD, you need to be sure that you won’t need the money until your account matures. Make sure your emergency fund can provide enough financial cushion to help you avoid having to put down a CD. Most experts recommend saving 3-6 months of living expenses.
Takeaway
If you’re considering opening a new savings account, you should first think about what your savings goals are, how quickly you want to get there, and how important it is to you to have access to funds. CDs can be a profitable option if you want to earn a high APY on your balance and don’t expect to need the money before the maturity date.
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