“Understanding CDs: How They Work and When to Invest”

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Understanding Certificates of Deposit (CDs)

A certificate of deposit (CD) is a savings account that offers a guaranteed interest rate in return for keeping your money in the account for a specified term. Generally, longer CD terms provide higher interest rates.

When Is the Best Time to Buy a CD?

Interest rates fluctuate, and the best time to buy a CD is typically when rates are higher. If you expect rates to drop, locking in a higher rate with a longer-term CD can help stabilize your earnings over time.

How CDs Work

When you open a CD account, you agree to lock your money in the CD for a set period to receive higher annual percentage yields (APYs) than other savings vehicles. For example, the Federal Deposit Insurance Corp. (FDIC) reports the national average yield on a 12-month CD is 5.46%, while the average traditional savings account earns 0.46% as of October 2023.

CD terms range from three months to five years and usually require a minimum deposit ranging from $500 to $2,500 or more. Some banks don’t require a specific deposit amount to start a CD.

CDs are considered a safe place to park your money as you usually can’t lose your initial deposit even if interest rates drop. Additionally, CDs are typically insured by the FDIC or National Credit Union Administration (NCUA) up to $250,000 per depositor, per insured bank, and per ownership category. Verify that the CD is federally insured before opening an account.

It’s possible to lose money on a CD if you deposit more than the federal insurance limits allow or if the financial institution fails. While the likelihood of losing money with a CD is low, you could miss out on interest if you withdraw your money before the CD’s maturity date, incurring an early withdrawal penalty.

Maximizing CD Rates

Opening a traditional CD account is straightforward, but you can maximize CD rates by implementing the right strategy or taking advantage of different types of CDs, such as:

• CD Ladder: Open multiple CDs with terms that end at different times to gain access to your CD balances periodically without paying early withdrawal fees.
• CD Barbell: Use short- and long-term CDs to reach both short-term and long-term savings goals.
• Bump-up CDs: Increase your interest rate before the CD matures, usually once per term.
• Step-up CDs: Your bank increases your yield automatically at regular intervals.
• No-penalty CDs: Withdraw money from your CD penalty-free at any time, though these tend to offer lower APYs.
• Jumbo CDs: Offer higher interest rates but require a substantial minimum deposit, often $100,000 or more.

The Bottom Line

Saving money is essential for financial health, but don’t forget how debt can erode your earnings. For example, earning a 5% APY on $2,000 in a CD is beneficial, but it often makes more sense to prioritize paying down high-interest debt. High debt balances can negatively affect your credit score. While investing in a CD can help you save money safely and earn a high yield, also consider other options for using your cash.

Consider tackling your debt with a repayment strategy, such as the debt snowball or debt avalanche method. Track your progress with free credit monitoring to see any changes to your credit report with updated monthly reports.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with the best mortgage solutions tailored to your needs.

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