Maximize Your Savings with Low-Risk CDs: Learn What to Consider Before Investing
Certificates of deposit (CDs) are an increasingly attractive investment option in the current market, offering a guaranteed return of 4% or more — some even offering yields of up to 4.75%. Whether you’re looking to capitalize on your savings potential, generate income in retirement, or diversify your investment portfolio, CDs offer a low-risk way to do just that. However, there are some things to consider before you open up a CD as the terms of the agreement are specific.
When you open a CD, you’ll determine the length of the fixed “term” that will be established — from three months to a number of years — and the money will be locked for that period of time. CDs provide a higher interest rate than a regular savings account, thus allowing for a greater return on your investment. However, you cannot touch the money until the term is complete, or you’ll incur a penalty for an early withdrawal. Liquid CDs, which offer flexibility in accessing the original deposit, are not as advantageous as traditional CDs in terms of interest rates.
Minimum deposit amounts vary from bank to bank. Generally, a bank will require you to deposit a minimum of $1,000 when opening a CD. However, some banks like Ally Bank offer CDs with no minimum deposit. Additionally, the longer the term, the higher the interest rate. For example, Ally Bank’s 3-month CDs pay 4.10% APY compared to their 10-year CDs, which pay 4.60% APY.
Furthermore, if you withdraw your money early, you will be subject to a penalty fee. For CD terms of three months or less, the penalty is 60 days of interest; for CD terms of 3 to 12 months, the penalty is the greater of 50% of the interest that would have been earned on your funds if held to maturity or 1% of the amount withdrawn; and for CD terms of more than one year, the penalty is the greater of 50% of the interest that would have been earned on your funds if held to maturity or 3% of the amount withdrawn.
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