How to earn more on your savings with a certificate of deposit (CD)

While having too much money in your savings account may be a nice problem to have, it can also be a missed opportunity. With the national average savings rate at just 0.46% as of April 30, 2024, your money has the potential to work harder for you elsewhere.

A certificate of deposit (CD) might be an excellent alternative to other savings accounts if you're looking for a low-risk option with a higher yield. Curious to learn more? This guide covers everything you need to know about CDs and how to decide if opening an account is the right move for you.

Certificates of deposit are a type of deposit account offered by banks and credit unions. While CDs allow you to earn interest on your money like other deposit accounts, there are some key differences to note.

Unlike savings or money market accounts, you can deposit a set amount of money into your CD account and commit to leaving your money there for a fixed period of time, which may range from three months to five years or even longer. In return, you'll earn a fixed amount of interest based on a predetermined interest rate.

When the CD term is up, you’ll be able to withdraw your original balance plus any interest earned. The key benefit of opening a CD is you’ll know exactly how much of a return you’ll receive when your money is ready to withdraw at the maturity date you selected.

It’s important to note, you typically can't withdraw cash from a CD before the end of the term, known as the maturity date, without a penalty. But because CDs tie up your cash, you often earn higher interest rates than other types of deposit accounts.

Generally, the longer the CD term, the higher the interest rate you may earn. For example, you will likely lock in higher rates with five-year CDs than three-month CDs. The trade-off, of course, is giving up access to your money for longer.

Those who may need to withdraw their funds sooner may opt for a shorter-term CD or a no-penalty CD, which as its name implies, allows you to withdraw your savings before the full maturity date without a fee. However, this added flexibility may come with lower interest earning potential.

Although there are several types of CDs, they all have four essential factors: the interest rate, term, principal, and maturity. These aspects can help you compare CDs, so you can find one that best meets your needs.

• APY: The annual percentage yield (APY) is the total interest you’ll earn on the CD in one year. APY takes into account compound interest, which is essentially the interest you’ll earn on top of interest. Learn more about APY and compound interest here.
• Term: The term is how long your money stays in the CD. Your term may last anywhere from a few months to a few years, with longer terms typically paying higher APYs. Most CDs charge a penalty to access your money before the term ends.
• Principal: The principal is the money you invest or your initial deposit into the CD. Some CDs may require a minimum deposit to fund the account, depending on the term.
• Maturity: The maturity is the end of your CD term. Once your CD reaches maturity, you’ll be able to withdraw your initial deposit along with your total earned interest.

There are a few factors that may impact CD APYs. While most may be out of your control, it still helps to know the basics as you're shopping around.

• CD term length: The longer your CD term, the higher your APY usually will be. A longer CD term offers more time for the bank to invest your money, and they will pay a premium for the opportunity.
• Federal Reserve rates: The Federal Reserve, or the Fed, makes interest rate decisions eight times per year. These decisions have a significant impact on deposit accounts, including CDs. When the Fed raises rates, deposit account interest rates tend to move in lockstep and vice versa.
• Financial institution competition: You may also see promotional APYs for CDs as banks and credit unions compete for your business. It's common to see higher APYs for CDs among online banks, which may not have the same operating expenses as brick-and-mortar locations.

One of the biggest perks of a CD over other savings vehicles is your chance to earn a higher APY. As mentioned earlier, according to the FDIC, national savings account rates are currently only around 0.43% (as of November 2024), whereas some CDs, such as those offered by Raisin’s partner banks and credit unions, are offering rates 10+ times higher.

Regardless of what happens to interest rates and economic markets, you’ll be guaranteed the same great rate and return. However, this does not apply to a market-linked CD, which provides a return based on the return of the underlying market

But there are drawbacks to consider, too.

If your money is deposited into a traditional CD account, then your money is technically stuck in the account until it matures.

Remember, while you can always access your money in the event of an emergency, you’ll likely be hit with early withdrawal fees that could reduce the interest you’ve earned. It’s smart to find out any penalties associated with an account before opening one.

You should also be cautious of automatic renewals at the end of CD terms. If you’re not aware of this account feature, then your CD could auto-renew, locking you into another full term. The best way to avoid this is by setting a renewal reminder ahead of time. Consider contacting your financial institution as your maturity date draws near to find out how to cash out or rollover your funds into a new CD if desired.

Another aspect of a CD to know before opening an account is that the money you earn in interest will be considered taxable income. This means you’ll be subject to both state and federal taxes based on your tax bracket. Your bank will send a copy of Form 1099-INT to use when filing your tax return.

There is no one-size-fits-all savings strategy. Your plan should consider factors like your goals, timeframe, and risk tolerance. But with savings account rates currently at a minimum, it may payoff to lock in a higher APY.

CDs may make sense if you’re saving for a mid-to-long-term goal where you have a specific time frame in mind. The various CD terms will allow you to select an account that matches your savings needs.

For example, you may have earmarked some funds for a home down payment or new car in two or three years. In this case, a CD with a term to match your timeline may be a great option to hold your funds. Not only will it allow you to max out your money’s earning potential with a higher APY, but it can also help you avoid the temptation of spending the savings within the account.

If, on the other hand, you expect to need your savings sooner or think financial emergencies could arise, then you may prefer a high-yield savings account. Of course, it may be helpful to speak to a financial advisor to help you decide the best ways to allocate your savings.

If you’re looking to earn more on the money in your savings account without the risk that comes with investments, like the stock or bond market, opening a CD may be an attractive option.

As you shop for CDs, you may want to consider more than finding the highest APYs. You can review CD terms, minimum deposits, and how to avoid penalties.

Raisin’s online savings marketplace makes it easy to compare the best CD offers from our exclusive network of partner banks and credit unions. You can quickly scan our platform, review each bank’s terms, and open a new CD within a few simple steps. Those with higher balances can even split deposits across multiple CDs, while still accessing accounts from one login.

By shopping for a CD with Raisin, your money can start working harder to earn the higher interest rate you deserve. Sign up for an account today.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.