If saving more money is on your list of 2023 financial resolutions, you might be thinking about where to put your savings and the fastest way to grow your funds. For some savers, a certificate of deposit (CD) could be the way to go.
CDs are a type of savings account that pays a fixed interest rate in exchange for setting aside money for a set period of time. Once it matures, you’ll have access to the amount you deposited, as well as the interest you’ve earned.
While this kind of account doesn’t offer as much flexibility as other alternatives like a traditional savings account or a high-yield savings account, many banks and credit unions are sweetening the deal by boosting the APYs they’re offering on their CDs.
CD rates are on the up and up—with one credit union offering a 6% 1-year CD
Savings rates have been on the rise over the past year as the Federal Reserve has moved to raise interest rates in an effort to curb inflation.
View this interactive chart on Fortune.com
While the Fed doesn’t set CD rates, an increase in the federal funds rate can 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 in Iowa is currently offering a 6% APY on their 1-year CD, which is one of the highest rates available right now. While this rate is only available for certain Iowa residents and can’t be opened 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 a number of savings vehicles you can choose to park your money in and choosing the right one will ultimately depend on a few different factors. A CD could be the right kind of account for you if:
- You’re saving for a specific goal with a clear timeline. CDs are offered in terms as short as one month, or as long as 10 years. However, no matter what term you choose, the same rules generally apply. You won’t be able to touch the funds in your CD until your CD matures. Making an early withdrawal will more than likely incur a steep penalty. If you’re saving for a specific goal like purchasing a home or vehicle and have a solid idea of when you’ll need your money, a CD could help keep you accountable to your savings goal.
- You already have money saved. While there are some CDs that allow you to add funds after you’ve opened it, generally the primary funding happens at the time that you open the CD. This means that you’d need to have a good amount saved—or at least the minimum amount needed to open the account when you select a CD.
- You have an emergency fund. Tapping into your CD before it matures could mean forfeiting some or all of the interest earned on your balance and potentially even a portion of your principal balance. When you lock your money up in a CD you should be sure that you won’t need your money until your account matures. Make sure your emergency fund can provide 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.
The takeaway
If you’re considering opening a new savings account, you should first consider what your savings goal is, how soon you want to get there, and how important it is to you to have access to your funds. A CD can be a lucrative option if you want to earn a high APY on your balance and don’t anticipate needing your money before your maturity date.
