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With interest rates expected to continue falling in the United States, now might be the perfect time to lock in today’s rates before they disappear.
This can be accomplished with CDs. However, I bet if you asked most of your friends what a CD actually is, they’d have no idea. As such, CDs remain to be one of the most underutilized savings products out there.
Today, I’ll explain what CDs are and the benefits they provide to people like you and me.
CDs Explained
A CD (Certificate of Deposit) is a savings product offered by banks and credit unions. It’s essentially a commitment device where you deposit money for a set period of time in exchange for a fixed interest rate.
For example, you could lock-in a 12-month CD for 4.00% APY, while your high yield savings account (HYSA) is earning 3.65%. If interest rates keep falling, your HYSA could drop to 3.50%, then 3.30% and so on. Meanwhile, your CD continues paying you 4.00% no matter what.
Of course, alternatively interest rates could rise during the term of a CD, meaning you miss out on those higher returns.
The catch is that you’re locked in for the full term. In short, if you withdraw these funds early you tend to have to pay a penalty (often several months of interest). Some banks offer “no-penalty CDs” that let you withdraw freely, but typically pay out lower rates.
So now that you understand what CDs are, here’s how to open one:
⚠️ REMINDER: If you bank is paying you 0.01% interest, you're leaving money on the table. SoFi Checking and Savings offers no fees and a much better APY.
How to Open a CD
Opening a CD is straightforward as most banks and credit unions offer them. Before committing, it’s worth comparing rates and terms to see which best fits your needs. Personally, I use Marcus by Goldman Sachs for my CDs.
I also have a Marcus HYSA, so I like having both products together. They offer multiple options including High-Yield CDs and No-Penalty CDs, all with key nuances worth considering.
The Bottom Line
CDs are a simple way to lock in guaranteed returns, especially when interest rates are falling. Of course, the limited flexibility means they’re not for everybody. Regardless, if you have cash sitting around that you won’t need for a while, it’s worth exploring.
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Steve
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Disclaimer: The content provided in this newsletter is for informational and educational purposes only. It is not intended to be a substitute for professional financial advice. Please consult with a financial advisor before making any financial decisions. This newsletter may contain affiliate links, which means I may earn a commission if you make a purchase through these links, at no extra cost to you.
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