A certificate of deposit is a conservative way to save money at a bank. In exchange for agreeing not to withdraw your money for a specified period of time, such as six or 12 months, a CD account will typically pay you higher interest rates than a traditional savings account. Here’s a look at how to save money using CDs for major purchases like an engagement ring or a house down payment.
Create Your Savings Timeline
When you open a CD, you agree to leave your money in the bank for a specific period of time, called the term length. CDs come in multiple maturity dates, often ranging from as short as one month to as long as 10 years or more. You can use this flexibility to match your savings with the duration of your financial obligation. For example, if you have a relatively short-term goal, such as a down payment due in three months, you can invest in a CD that matures in three months. That way, you can earn interest on your savings in an FDIC-insured investment for the exact amount of time that you need it, and you won’t be tempted to touch that money in the meantime.
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Match Your CD Strategy With Your Financial Goal
Once you know your timeline and what your end goal is, you can start shopping for the CD product that will help you achieve that goal. Consider all factors before locking in your money, such as:
- Whether the rate is fixed or can be increased.
- Whether you can add deposits mid-term.
- Whether there are any early withdrawal penalties.
- Other additional aspects of the CD account that might affect your decision.
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Using a CD to Save for an Engagement Ring
An engagement ring can be one of the costliest investments of your life, outside of buying a home or a car. The national average cost of an engagement ring is over $6,000, according to The Knot 2016 Real Weddings Study. If you’re saving up for this type of large purchase, it’s important that your money is available when you need it. A CD might be a perfect choice, both for its safety and for its ability to provide you with additional interest while you save.
Because you’re likely going to save for an engagement ring for at least a few months, CDs can offer a convenient way to park your money over time. Whenever you set aside a chunk of money, you can use it to buy a short-term CD. For example, if you plan to save for at least a year, you can either buy a series of three or six-month CDs and roll them over as they come due, or you can buy a one-year CD right at the outset, if you can get a high interest rate.
Protecting Your Savings for a Home Down Payment
Similar to an engagement ring, saving for a home down payment is usually part of a longer-term savings strategy. If you need to amass $40,000 for a 20 percent down payment, for example, you can start saving in $1,000 increments, purchasing a CD every time you have the minimum amount saved so that you can accrue more interest. Some banks have low or even no minimum purchase requirements for a CD, so you can invest your money whenever you scratch together even a few dollars. Over the course of a long-term savings plan, it’s easy to be tempted to use that money for other needs, wants or emergencies, but with a CD, your investment is locked in for the duration of the term, which can ultimately help you hit your savings goal.
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Planning for Big, Home-Related Purchases
Home-related purchases, such as getting a new roof or undertaking a renovation, typically have smaller capital requirements than actually buying a home. As such, you can use the flexibility of CDs to tuck away money over a shorter time period, such as three or six months. Although you’ll likely get a lower rate than you would with a longer-term CD, you’ll still have the same FDIC insurance, and you’ll likely be earning more interest than you would with a simple savings account.
Saving for Your Dream Vacation
Perhaps the most enjoyable expense to save for is vacation. Because it’s usually beneficial to plan vacations well in advance, you should have an accurate timeline around which you can plan your CD savings strategy. For example, if you know your vacation is in seven months, you can buy a six-month CD and have your money available for you in plenty of time. In the meantime, you’ll be earning interest on your savings, so you can afford that extra dining experience or excursion during your trip.
Consider Getting a High-Interest CD
When it comes to CD savings, it makes sense to search for the highest interest you can earn. Some firms market high-interest CDs as paying more than traditional CDs. Whether or not your CD is labeled as a high-interest CD, however, you should search for the investment that matches your needs in terms of rate, maturity date and safety.
Compare CD Rates Before You Lock Your Money In
Get a better idea of the interest you could be earning by using CDs. Here are CD rates from a few well-known institutions:
|Current CD Rates|
|Financial Institution||Term||Interest Rate|
|Discover Bank||12 months||1.35% APY|
|Citibank||12 months||0.15% APY|
|Bank of America||12 months||0.07% APY|
|Wells Fargo||12 months||0.05% APY|
|CIT Bank||12 months||2.20% APY|
|CIT Bank rate accurate as of today.|
All other rates accurate as of July 28, 2017.
Set Up a CD Ladder
If you have a long-term savings goal or a series of major purchases coming up, you can construct a CD ladder to ensure the money is available when you need it. A CD ladder consists of a series of CDs with differing maturity dates, with each date coming due like a rung of an imaginary ladder. For example, you could build a five-year CD ladder comprised of five CDs, with one coming due each year. CD laddering can come in handy if you have annual financial obligations, such as school tuition.
If you’re using CDs as an enhanced savings account, you can keep the CD ladder in place. Simply take the money whenever a CD matures and roll it back into a new CD at the end of the ladder. For example, if you buy a 10-year CD ladder, after one year, you’ll be paid cash for the maturing CD and have nine remaining CDs, ranging in maturity from 1 to 9 years. If you take the maturing money and purchase a new 10-year CD, your original 10-year CD will remain intact.