How to Use CDs Now: Short-Term vs Jumbo vs No-Penalty
Savers have an edge if you know where to look.
If you want guaranteed returns on some of your cash, it's hard not to consider a certificate of deposit. Some of the best CD rates offer higher APYs than high-yield savings or money market accounts.
This is essential, too, as persistent inflation and the possibility of future Federal Reserve interest rate hikes create an uncertain economic climate. Right now, savers must balance maximizing immediate growth and remaining flexible enough to adapt if economic conditions shift.
With that in mind, here are three CDs I recommend using right now, as someone who monitors CD rates on a weekly basis.
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Short-term CDs maximize growth with flexibility
A short-term CD of three months to a year is a smart move given the current economic climate. Why? Because you'll likely earn a guaranteed rate of return that outpaces inflation.
You'll also have access to your cash within the year. If prices continuously rise, you can pivot to other options that protect your purchasing power. Also, if the Federal Reserve hikes rates again, you might earn even more on your next CD.
You can use this Bankrate tool to compare short-term options quickly.
While this option works well for most savers, if you want to move a significant portion of cash (think at least $50,000) into a CD, here's another smart option.
A short maturity for larger sums
For large deposits ($50,000+), I recommend a jumbo CD. They offer some of the highest returns compared to other savings accounts, with maturity windows between six months and one year.
CreditOne Bank offers a 12-month jumbo CD at 4.60% APY with a $100,000 minimum deposit. If you deposit $100,000, you'll earn $4,600 effortlessly.
A few things to consider with this approach: Like all CDs, look for a bank offering FDIC insurance. This protects each depositor up to $250,000 if your bank goes under.
Two, because you're dealing with a larger cash balance, only use one if you don't need to touch the money until the term expires. If you need to break it open, you could lose thousands of dollars.
Most CDs come with early termination fees. Those fees depend on the CD's term. For shorter-term CDs of one year, you'll likely forfeit a few months of interest, whereas with longer CDs, it could be up to six months.
If cash flexibility is a priority, then consider this CD instead.
A safe solution with no penalties
A no-penalty CD can be an excellent start if you've never had a CD before and don't want to commit to a longer-term option. How it works: You'll open and deposit as you would with any other CD. They even come with short maturity windows, usually six months to a year, depending on the bank.
My recommendation: Climate First Bank has a six-month no-penalty CD, where you'll earn 4.33% APY with only a $500 minimum deposit.
However, unlike regular CDs, you can withdraw from them. Some banks allow you one withdrawal per month, while others will just close your CD without any early termination fees.
Before signing up, pay attention to the vesting period: It's the time banks require you to keep funds in the account before you can withdraw. Thankfully, for no-penalty CDs, this is usually one week to one month, so you can change your strategy right away if you need to.
A few things to consider with a CD...
- Taxes: Interest earned on CDs is taxed as ordinary income, so account for this liability in your financial planning.
- Fed policy: CDs have fixed interest rates, so if the Federal Reserve hikes rates during your term, your earnings won't be affected. If you're banking on the Fed raising rates again in December, a short-term CD might be your best bet.
- Maturity: Many banks auto-renew your CDs. If you forget and it renews, a grace period of seven to 10 days applies, depending on the bank. I recommend setting a phone reminder a few weeks before it matures, which gives you time to plan.
- Purchasing power: Notice how I didn't mention a longer-term CD? My concern is that, given the current economic climate, prices could continue to rise, eroding future purchasing power. Locking in a long-term CD now is a smart way to allocate funds to risk-free options as you approach retirement, but I don't recommend it as a growth strategy given current economic conditions.
High interest rates present a rare opportunity for savers. Choosing the right CD can lock in high guaranteed returns, outpace inflation and maintain the flexibility to respond to changing economic conditions.
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