By Sabrina Karl
If you have money to sock away that isn’t appropriate for the stock market, or you simply want to earn a safe, reliable return, certificates of deposit offer a virtually risk-free way to grow your savings.
CDs have much stricter rules than savings or money market accounts, in exchange for earning a higher interest rate than these other accounts pay. Because of this, savvy CD savers employ a handful of best practices before they open any new CD.
The first is simply shopping around, including among online banks and credit unions, as these two institution types often pay very competitive rates. Shopping for the best rate is critical as you can earn about 20 times more from a top-paying CD versus one paying the national average.
After narrowing your list, check the early withdrawal policy of any institution you’re considering, since the penalties vary widely. Even if you don’t expect you’ll need to cash out early, it’s best to compare how mild or onerous a bank’s penalties are, and to avoid any policy that allows the penalty to eat into your CD’s principal.
Once you’ve chosen an institution and a CD, it’s important to think through how much you’ll deposit. That’s because you only get one shot with your initial CD deposit. Unlike savings and money market accounts, where you can make a small deposit at the time of account opening and then add more later, CDs generally only accept a single deposit.
Lastly, as soon as you open your CD, make a calendar reminder for yourself 2-3 months before the maturity date. This gives you time to decide what to do with the money coming out of the CD, and alerts you to watch for the bank’s notification letter with instructions on how to convey your wishes.