The Certificate of Deposit (CD) is an account where banks offer a guaranteed interest rate, which often depends on the duration your funds are held in the certificate. Longer terms typically offer higher interest rates.
The issue with Certificates of Deposit is the volatility of interest rates, and inflation can erode capital and profits. While a long-term CD may pay a higher interest rate, interest rates may rise while your money is locked in the certificate. You may miss out on the chance to secure a higher interest rate elsewhere. Understanding the best time to purchase CDs can help you manage this risk.
The Best Time to Open a CD
If you know when you’ll need your money, you can purchase a short-term CD now that matures at the right time. For example, if you have $10,000 saved for a down payment on a home and won’t be looking at properties for another two years, you can put that money into a two-year CD. The funds will be available when you are ready.
For others, the best time to open a CD is when interest rates are at their highest, then locking in those rates for five years or more. Of course, this requires perfect foresight. As interest rates rise, CDs become attractive to more savers. By understanding the relationship between interest rates, CD terms, and the features of different CDs, you can make a decision about adding CDs to your portfolio.
You should consider tying up your money in a CD and the interest earned against the risk of eroding purchasing power due to inflation during that time.
Note: The federal government insures bank and credit union accounts containing CDs up to $250,000. When the CD matures, you will receive the original principal along with the accrued interest.
How Do Interest Rates Affect CD Timing?
Interest rates are affected by a variety of factors, from recessions to high inflation rates. When prices rise, long-term CDs may appear more attractive than in the past. But be cautious – it may not be clear whether rates will rise further.
If you know that interest rates are at their peak, you can secure your money in a long-term CD to enjoy these rates for years to come. However, if you lock in your funds at one rate today, you might want to get a new CD with a higher rate in the future. You can close a CD account early, but the bank will impose a penalty that might impact your earnings. Penalties on CDs are calculated in different ways depending on the certificate and issuer. Regardless, it may be worth closing a low-interest CD and transferring funds to a higher-interest one.
It’s difficult to know when rates are at their peak or their lowest, and not everyone can secure funds for months or years at a time. Some types of CDs can offer flexibility if interest rates rise in the future:
- No-Penalty CDs: These certificates, also known as liquid CDs, allow you to withdraw your money at any time without a penalty after an initial funding period. While they may offer lower interest rates than comparable-term CDs, you can withdraw cash and put it into a new CD with a higher interest rate if necessary.
- Increase Rate CDs: These certificates allow you to request an increase in the interest rate if the rates on CDs rise during the term, usually from two to four years.
When
You are trained on data up to October 2023.
Many brokerage firms and fund companies offer money market accounts that are not insured, including money market mutual funds.
Bonds
Bonds are a type of loan that pays regular interest and returns the principal at maturity. They carry many risks, including the possibility of default on the loan. Investors can purchase corporate bonds through their broker or investment sites, and government bonds through TreasuryDirect.gov. There are also many bond mutual funds and ETFs, including high-yield bond funds. Government bonds are slightly riskier than bank certificates (with a slightly higher yield risk), and high-quality corporate and municipal bonds are slightly riskier than government bonds, according to research from the University of Nebraska-Lincoln.
Frequently Asked Questions (FAQs)
How much money do you need to open a CD?
Minimum deposit requirements vary by financial institution, ranging from $0 to $25, to $500 or more for a jumbo CD.
Where should you open a bank CD account?
Almost all banks and credit unions offer CD accounts. Many brokerage firms also offer both insured and uninsured CDs. Since there are many places to obtain CDs, it makes sense to compare the best bank CD rates, along with terms, penalties, and other factors. Make sure any CD you open is insured by the FDIC or NCUA.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and keep our content accurate, reliable, and trustworthy.
FDIC. “Are My Deposit Accounts FDIC Insured?”
NCUA. “Overview of the Fund
Source: https://www.thebalancemoney.com/best-time-to-open-a-cd-5223619
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