CD rates in August are still red hot. The Federal Reserve opted not to lower its benchmark interest rate in late July, thereby allowing the strong CD rates that have been around since the start of the year to remain available to savers.
You may be eager to open a CD this month while rates are still strong. But if you’re interested in a CD, do your best to avoid these big mistakes.
1. Not making sure you’re set with emergency savings first
The benefit of keeping your money in a CD over a savings account is twofold. First, with a CD, you’re likely to score a higher interest rate because you’re committing to keeping your money in the bank for a while. Secondly a CD lets you lock in that interest rate for its duration.
If you open a 12-month CD at 5%, you’re guaranteed that 5% for an entire year. With a savings account, the interest rate on your account could fall with market conditions (it could technically also rise, but based on today’s environment, a drop is the most likely scenario).
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American Express® High Yield Savings  APY 4.25% Rate info 4.25% annual percentage yield as of August 9, 2024 Min. to earn $1 Member FDIC. |
APY 4.25% Rate info 4.25% annual percentage yield as of August 9, 2024 |
Min. to earn $1 |
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CIT Platinum Savings  APY 5.00% APY for balances of $5,000 or more Rate info 5.00% APY for balances of $5,000 or more; otherwise, 0.25% APY Min. to earn $100 to open account, $5,000 for max APY Member FDIC. |
APY 5.00% APY for balances of $5,000 or more Rate info 5.00% APY for balances of $5,000 or more; otherwise, 0.25% APY |
Min. to earn $100 to open account, $5,000 for max APY |
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UFB Portfolio Savings Account  APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you’ll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. Min. to earn $0 Member FDIC. |
APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you’ll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. |
Min. to earn $0 |
But savings accounts offer one big benefit over CDs: flexibility. You can withdraw from a savings account at any time without having to worry about negative consequences. With a CD, there can be steep penalties for taking an early withdrawal.
So before you open a CD, make absolutely sure that you’re all set as far as your emergency fund goes. If you take money you should’ve earmarked for emergencies and put it into a CD, you might end up paying a penalty fee if you have to withdraw that cash before your CD matures.
At a minimum, you should aim for your emergency fund to have enough money to cover three full months of essential living costs. Some people even like to aim for six months’ worth. Assess your needs and savings either way before moving forward with a CD.
Because CD rates are strong in general, it’s easy to look at the attractive rate your bank is offering and assume it’s the best deal available. But you never know when another bank might have a slightly better deal. And if you’re going to commit to a CD, you might as well eke out as much interest as possible.
So before you open a CD, shop around a little bit. Compare offers and terms so you can feel more confident in your choice.
3. Not setting up a CD ladder
As mentioned, one pitfall you might face with a CD is an early withdrawal penalty for having to take your money out before your CD matures. But a good way to reduce that risk is to set up a CD ladder instead of opening one CD.
With a CD ladder, you divide your deposit into a number of smaller ones and then use that money to open a few CDs with staggered maturity dates. The goal is to have a portion of your money free up at different times so you can access that cash if you need it.
Here’s how a CD ladder might work: Say you have $3,000 you want to put into a CD. Rather than stick all of it into a 12-month CD, you could instead:
- Put $750 into a 3-month CD
- Put $750 into a 6-month CD
- Put $750 into a 9-month CD
- Put $750 into a 12-month CD
This gives you access to a portion of your money every three months. If you end up with a large unplanned expense that wipes out your emergency fund, you may be able to take the remaining money you need from a maturing CD without having to cash one out early.
It’s definitely a great time to put money into a CD. But try to avoid these mistakes so you don’t wind up regretting your decision.
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