If saving more money is on your list of 2023 financial resolutions, you might be wondering where to put your savings and the fastest way to grow your funds. For some savers, a certificate of deposit (CD) may be the way to go.
CDs are a type of savings account that pays a fixed interest rate in exchange for setting aside money over a set period of time. Once it matures, you will have access to the amount you deposited, as well as the interest you earned.
While this type of account does not offer as much flexibility as other alternatives such as traditional savings accounts or high yield savings accountmany banks and credit unions sweeten the deal by increasing the APYs they offer on their CDs.
CD rates are on the up and up—with a credit union offering a 6% 1-year CD
Savings rates have been rising over the past year as the Federal Reserve has moved to raise interest rates in an effort to curb inflation.
While the Fed does not set CD rates, an increase in federal funds rate make borrowing more expensive and encourage consumers to save more. Many financial institutions take this as an opportunity to raise savings rates.
In fact, Advantage Credit Union of Iowa today offers 6% APY in their 1 year CD, which is one of the highest rates available today. While this rate is only available for some Iowa residents and cannot be accessed online, it could signal a larger trend if the Fed continues to raise the federal funds rate in 2023.
3 reasons a CD may be right for you
There are several storage vehicles that you can choose to park your money in and choosing the right one will ultimately depend on a few different factors. A CD may be the right type of account for you if:
- You are saving for a specific goal with a clear timeline. CDs are offered for terms as short as one month, or up to 10 years. However, no matter which term you choose, the same rules generally apply. You can’t touch the funds in your CD until your CD matures. Making an early withdrawal will more than likely incur a high penalty. If you’re saving for a specific goal like buying a house or car and have a firm idea of when you’ll need your money, a CD can help keep you accountable to your goal. to save.
- You have money saved up. While there are some CDs that allow you to add funds after you open them, most of the time the initial funding happens when you open the CD. This means that you need to have a good amount saved at least the minimum amount required to open the account if you choose a CD.
- You have an emergency fund. Tapping your CD before it matures could mean losing some or all of the interest earned on your balance and possibly even a portion of your principal balance. If you lock your money in a CD you should be sure that you won’t need your money until your account matures. Make sure your emergency fund can give you enough of a financial cushion to help you avoid having to dip into your CD. Most experts suggest having 3-6 months worth of living expenses saved.
If you’re thinking about opening a new savings account, you should first consider what your savings goals are, how quickly you want to get there, and how important it is to you to have access to your funds. A CD can be a useful option if you want to earn a high APY on your balance and don’t expect to need your money before your maturity date.
EDITORIAL DISCLOSURE: The advice, opinions, or rankings contained in this article are those of Fortune Recommends™ editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.