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Having “The Talk” About Making Your Money Work Harder: Part 3 – CDs

Welcome back to our five part series on making your money work harder! This series is part of a BIG conversation I had with J where we talked about other ways to invest his money beyond the Bank of Mom.

In part 1, we talked about savings accounts, in part 2 we discussed savings bonds and now here’s a recap of our conversation on CDs.

What are CDs?

CD stands for “Certificate of Deposit” and you can open one at your bank or credit union. CDs are very similar to standard savings accounts except you deposit a fixed amount of money for a fixed period of time at a guaranteed interest rate.

CDs typically earn a higher interest rate than standard savings accounts. In reference to our series here, CDs are making our money work the hardest so far — harder than both savings accounts AND savings bonds. (Well… except the Bank of Mom, which pays quite a bit.)

Additionally, you can earn a higher rate with a larger opening deposit and a longer term.

Some banks offer standard CDs only, and other banks may have additional types. Ally offers three types of CDs — a High Yield CD, a No Penalty CD and a Raise Your Rate CD.

When your CD matures (meaning that your fixed period of time is up), you’ll get a notice from your bank or credit union. At that time, you can either cash it out (receiving the principal plus interest) OR roll the money over into a new CD (and potentially add funds to it at this time).

What are the Pros and Cons?

There are lots of pros to opening a CD. Like savings accounts, CDs are insured, so they are almost risk-free investments. And like we said earlier, they often offer a higher interest rate than regular savings accounts.

Also, if you don’t need the money for awhile (or know you will need it a few years from now), a CD may be a good option for you. The money is there, earning more interest, with not a lot of risk and you can’t get to it easily in the interim.

However, there are a few cons.

Some CDs have a large minimum deposit, and that amount may be more than you have or would like to invest. For example, Synchrony Bank requires a $2,000 minimum opening deposit.

Since your money is locked in, if you need it, you may have to pay a penalty for early withdrawal. The penalty may depend on the term of your CD, but check your bank for specifics.

If rates go up during your CD term, you may lose out. For example, if you open a CD with a 5 year term at 2.25% and two years into the term the rate goes up to 4%, you’d be missing out.

(Some people get around some of these cons by using a CD ladder strategy.)

CDs as Part of Our Portfolios

I currently have several items in my financial portfolio, but CDs aren’t one of them. In fact, I’ve never owned a CD!

When J and I had our big conversation and talked about rates, J saw that Ally was advertising 2.25% for a CD. He knows that a higher rate when saving means more interest earned, so he asked about the details.

We looked into it, weighed the pros and cons and decided to purchase one. He chose a 2 year CD at 1.5%. He moved $500 from his savings account earning 1.25% to the CD.

J elected the Raise Your Rate CD in case rates go up during the term. If they do go up, he can switch to the new, higher rate (just once during the term). (In fact, at the time of this writing, the rate has already gone up to 1.65%. Should we switch now or wait to see if it goes higher? Decisions, decisions.)

CDs and YOU

Like with all information on this site, I’m not advocating any one product or path. (Well, other than saving in general.)

If you decide that a CD is right for you and your portfolio, shop around for a CD that fits your time frame and monetary investment. Consider banks you already use — personally, I like to keep things simple by not having too many accounts all over the place. Also, read the terms and fine print on any CDs you’re considering.

Good luck and happy investing!

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