Not every CD is right for every saver. In this post, you’ll find tools to help you make the best choice for your goals, priorities and circumstances. It boils down to finding the right balance of interest and access at the right time, and it pays to shop around.
When access to your money is important
In most cases, banks charge a penalty for closing a CD before it reaches maturity, and the penalty can be substantial. So before committing to a CD, ask yourself: Is this money that I’ll need if a health emergency or other urgent cost arises in my life?
If the answer is yes, then access is a priority for you. Consider carefully the withdrawal terms of your CD. Will your bank charge a penalty? How much? Will it be calculated according to interest earned, or might it also take a bite out of your initial deposit, or principal? A long-term CD with a large withdrawal penalty is a no-risk way to save – as long as you can leave the money untouched for five years.
If you need more flexibility, you’ll want to look for a shorter term or smaller penalty. For example, some CDs even offer no-penalty withdrawals before the product reaches maturity. This means if you decide to withdraw early with a no-penalty CD, you’ll get 100 percent of your principal plus 100 percent of your interest earned. These CDs are similar to a savings account in the respect that you do have some access to your money and you are earning interest on top of it. This makes it ideal for savers who want to keep their spending options open. (We may be a little biased, but we think that Ally’s 11 Month No Penalty CD is the best no-penalty CD around!)
When the issue on your mind is timing
Let’s face it: Interest rates for savings have been in a slump. Even the best are running lower than rates, say, five years ago. Some savers are comfortable committing to a CD and temporarily losing spending power for things like cars and clothes, but they get stuck on this issue of timing. What if a better rate comes along? No one enjoys the sting of a missed opportunity.
If timing is a concern for you, consider looking for CDs with features like best rate guarantees or rate increase option. All of Ally’s CDs come with the Ally Ten-Day Best Rate Guarantee. That means that if you open or renew a CD, you get the highest rate available within 10 days of your account opening date if you fund your account during that time or renewal. For even more flexibility, you can get a CD with a rate increase option. The Ally Raise Your Rate CD lets you lock in at a competitive initial rate and then take advantage of a one-time rate increase anytime during the two year CD term.
When what you want is the highest rate. Period.
As you look more closely at the range of CDs available, you’ll notice a pattern: The bigger the time commitment, the better the interest rate. For customers whose top goal is to secure the highest earnings while keeping risk low, long-term CDs can be the best choice. It’s worth noting that such customers often own more than one CD, and stagger their purchases over time. First, they look for this year’s best long-term rate, then next year’s best long-term rate, and so on – using a technique called CD laddering. That technique is what we’ll discuss in our next post.
So let’s review. We’ve discussed how to identify and balance the priorities of access, interest and timing as you select the right CD for you. To take your research a bit deeper, you might want to try the following online resource:
Mint.com – Compare the latest CD interest rates, and try the CD-selection tool. Click around the site, as well. There are other helpful tools and articles on budgeting and assessing your savings needs.