In the world of deposit accounts, certificates of deposit (CDs) set the standard for reliability. You’re guaranteed a certain annual percentage rate of return (APY) on your money no matter how much interest rates rise or fall, and—assuming your CD is at an FDIC-insured institution—you don’t have to worry about losing your principal lose.
However, CDs also have many restrictions and rules that can be problematic for account holders, such as: B. that you cannot withdraw before a certain time – or a certain due date. Knowing what you’re looking for to save money can help you decide if a CD is worth it.
CNBC Select explains the pros and cons of saving money on a CD and what you should consider before opening a CD.
Types of CDs
If you want to store your savings on a CD, you can choose from many options, such as: B. traditional CDs, special CDs and brokered CDs. Traditional CDs allow you to deposit money at a fixed interest rate for a set period of time, which can range from seven days to ten years. Normally, the longer the term, the higher the effective annual interest rate.
The First National Bank of America CD, selected for Best One-Year CD by Select, earns 4.40% APR at the time of writing. Ally Bank High Yield CD also offers 4.10% APY for its 5-year CD.
First CD from National Bank of America
First National Bank of America is a member of the FDIC.
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Annual Percentage Yield (APY)
Online deposit interest from 4.55% to 5.15%* APY
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Conditions
From 12 months to 84 months
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Minimum balance
$1,000 to open and earn interest**
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monthly fee
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Prepayment penalty fee
FNBA allows partial withdrawals. The penalty calculated depends on the term of your deposit certificate. The penalty may result in a reduction in your principal balance.
*Annual Percentage Yields (APY) are subject to change without notice. Fees could reduce the income in the account. A payout leads to a reduction in earnings.
**Minimum balance of $1,000 to receive APR. The effective annual interest rate for all certificates assumes that capital and interest remain on the deposit until maturity. A penalty may be imposed for early withdrawal.
Ally Bank® CDs
Ally Bank® is a member of the FDIC.
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Annual Percentage Yield (APY)
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Conditions
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Minimum balance
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monthly fee
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Prepayment penalty fee
High-Yield CDs and Raise Your Rate CDs incur early withdrawal penalties that vary depending on the CD term. The No Penalty CD allows you to withdraw all your funds at any time after the first 6 days from the date you funded the account and keep the interest you earned without penalty.
Because you can’t withdraw from traditional CDs before the maturity date without paying a penalty, depositors who want more liquidity should look at some specialty CDs. For example, no-penalty CDs allow you to easily withdraw money before the maturity date without paying the fee.
Brokered CDs sold through a brokerage firm offer greater liquidity because they can be traded like bonds on the secondary market. However, you also face more risk because you could lose money if you sell before the maturity date if interest rates rise.
Advantages of a CD
- Higher APR: CDs typically offer a higher APR than traditional savings accounts or Money market accounts. Because of the Federal Reserve’s rate hikes, the national average one-year CD rate is 1.72 percent in 2023, up from 0.3 percent last year. In contrast, the national savings average in high-yield savings accounts is 0.42 percent (as of this writing).
- Fixed rate: CDs have a fixed interest rate, unlike high-interest savings accounts, which have variable APRs. You’ll get the most benefit from CDs if you lock in a high interest rate when you open the account, especially if interest rates decline afterward.
- CD conductor: While longer-term CDs offer higher APYs, you can use a strategy called “CD laddering” to take advantage of CDs’ advantages while minimizing their disadvantages. Instead of depositing a large amount of money into a single CD account, you can create multiple CDs with different maturity dates. If you do it right, you’ll always have some money left over that you can either put back into CDs or spend as you wish.
Disadvantages of a CD
- Minimum deposits: CDs generally only allow an initial deposit, with the exception of additional CDs. And while many CDs require low minimum deposits, others require a higher deposit to earn a higher interest rate. For example, brokered CDs may require a down payment of $10,000 or more.
- Early repayment penalty: Banks and credit unions often charge a fee if you withdraw money before the due date. These withdrawal fees typically depend on how your financial institution determines whether they are charged monthly or daily, your total balance, or the amount of your withdrawal. Some institutions also do not allow partial advance withdrawals, so you may have to withdraw the entire amount.
- Less liquidity: Although CDs certainly grow your money, they also give you less access than a savings account. Otherwise, if you need your money sooner, a high-yield savings account may be a better option.
If it makes sense to have a CD
CDs are a great option for storing your money long-term in a capital-protected savings vehicle, especially if you can lock in a high interest rate. While the lack of liquidity with traditional CDs can be viewed as a disadvantage, it also prevents you from giving up your money prematurely to make an impulse purchase. It may also make sense to keep it for a short time on a CD that offers a term of six to 18 months. If you’re concerned that interest rates might increase after you open the account (meaning you’ve locked in your savings to get a lower interest rate than you would otherwise receive), you might choose one option Bump-Up or Step-Up CD. Generally, these specialty CDs allow you to request an increase in your APY from the bank or credit union under certain circumstances (for example, if the financial institution has increased its interest rates on similar CDs).
When it doesn’t make sense to have a CD
If you are concerned about not being able to access your money easily and quickly, you can deposit your money into an account type that better suits your needs. For example, if you have an emergency fund, keep it in a savings account instead of a CD so you can withdraw it when needed.
Although CDs offer great security and can offer a higher APR than a high-interest savings account, you still may not get the best possible return for your money with a CD. Because even if you don’t have to worry about losing your principal, you could miss out on new CD offers and a higher rate if rates go up. Instead, it may be best to diversify your funds by building wealth with other assets and using CDs for a portion of your portfolio.
CD alternatives
If a CD account isn’t the best option for storing your money, other alternatives like high-interest savings and money market accounts can also work well. CNBC Select rated the Western Alliance Bank Savings Account as the best high interest savings account for its high 5.32% APR with no monthly fees and low minimum deposit requirements. The Marcus by Goldman Sachs High Yield Online Savings was also ranked as the best high-yield savings account with no fees.
Western Alliance Bank Savings Account
Western Alliance Bank is a member of the FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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monthly fee
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Maximum transactions
Up to 6 transactions per month
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Excessive transaction fee
If there are insufficient funds, the bank may charge fees
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Overdraft fee
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Offer a checking account?
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Offer an ATM card?
Marcus from Goldman Sachs High Yield Online Savings
Goldman Sachs Bank USA is a member of the FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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monthly fee
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Maximum transactions
There is currently no limit to the number of withdrawals or transfers you can make from your online savings account
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Excessive transaction fee
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Overdraft fee
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Offer a checking account?
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Offer an ATM card?
Money market accounts – or MMAs – could also significantly boost your balance, as the national APR is currently 0.44% for deposits under $100,000, according to the Federal Deposit Insurance Corporation (FDIC). Unlike brick-and-mortar savings accounts, high-yield accounts, and CDs, MMAs offer checking account features such as check-writing authority, debit cards, and access to out-of-network ATMs with fee reimbursement.
The Ally Bank Money Market Account offers a 4.15% APR with no minimum balance or monthly fees and up to 6 free withdrawals or transfers per statement cycle.
Ally Bank® Money Market Account
Ally Bank® is a member of the FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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monthly fee
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Offer checks?
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Offer debit/ATM card?
Bottom line
CDs are a great savings tool if you can store your money for a specific period of time earning more interest than other savings accounts. However, because you have less access to your money than these accounts, it’s important to consider what you’re looking for with your savings and the types of CDs available. If you want better access to your money, a high-yield savings account may be a better deposit account for you. Remember, you don’t have to choose one or the other – different accounts for different goals is usually the way to go.
Editorial note: The opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial team alone and have not been reviewed, approved or otherwise endorsed by any third party.