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With interest rates at their level the highest levels in decadesmany savers are turning to Certificates of Deposit (CDs) to maximize the returns on their hard-earned money. This is a smart strategy to use, given that many CDs offer returns that exceed traditional savings accounts and even some high-yield alternativesThis allows you to earn substantial returns – and when you consider the other benefits CDs offer, it’s easy to see why these deposit accounts are so popular.
These benefits include the fixed rate of return that CDs offer. Unlike standard savings accounts, which are subject to fluctuating interest rates, CDs lock in a fixed rate for the total duration of the accountThis feature is particularly interesting in the current context, where rates remain high but are likely to change soon.
Before you rush out and open a CD, however, it’s important to understand that there are a few key mistakes to avoid. Knowing what they are and how to avoid them can help you maximize the potential of your CD investment this fall.
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3 Big CD Mistakes to Avoid This Fall
If you’re planning on opening a CD soon, make sure to avoid these big mistakes:
Waiting too long to open one
One of the biggest mistakes you can make when opening a CD this fall is procrastination. While it may be tempting to try to wait out even higher rates, current economic indicators suggest that Now it’s time to lock in your rate.
With inflation cooling Over the past four months, the Federal Reserve has become widely expected to lead its first rate cut in September. When that happens, it could have a significant impact on CD Rateswhich could mark the end of the high-yield environment savers have come to expect. By opening a CD now, however, you can ensure you get one of today’s high rates before they start to fall.
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Focus only on APY
While a top Annual Percentage Yield (APY) While annual yield is undoubtedly attractive, it shouldn’t be the only factor guiding your CD selection. After all, other aspects can have a significant impact on the overall value and suitability of the CD. Some key factors to consider beyond annual yield include:
The early withdrawal penalty
Life is unpredictable and you may need to access your funds before the The CD is coming of ageso understand the early withdrawal penalty is crucial. Some banks charge a flat fee, while others may waive a certain number of months of interest. If you’re worried about needing to access your money, a slightly lower APR with a more lenient early withdrawal policy might be more beneficial in the long run.
Minimum and maximum deposit requirements
CDs often come with a minimum and minimum maximum deposit limitsSo make sure the CD you’re considering is a good fit for the amount you plan to invest. Some high-yield CDs may require substantial minimum deposits, which may not be feasible for everyone. Conversely, if you have a large sum to deposit, be aware of maximum deposit limits that will lower your APY.
The duration of the term
THE CD duration Choosing your CD is a crucial factor, so be sure to evaluate your financial goals and liquidity needs before making your decision. While longer terms allow you to lock in your rate for a longer period of time, guaranteeing your returns over a longer period of time, they also mean that your money is tied up for an extended period of time. A shorter-term CD, even with a slightly lower rate, may be better if you anticipate needing the funds sooner.
Additional features
Some CDs offer unique features such as rate increases or penalty-free withdrawalsThese features might make a CD with a slightly lower APY more attractive overall.
Don’t sort your CDs
Another easy mistake to make is putting all of your funds into a single CD. While this approach may seem simple, it often leads to missed opportunities and reduced flexibility. Instead, sort your CDs.
When you sort your CDsYou spread your investment across multiple CDs with different maturity dates. For example, instead of investing $10,000 in a single 5-year CD, you can divide it into five $2,000 CDs with terms of one, two, three, four, and five years. This gives you access to a portion of your investment at regular intervals, allowing you to access a portion of your funds without paying additional fees.
As each CD matures, you also have the option to reinvest at current market rates. This allows you to take advantage of rising rates, should rates rise in the future, while protecting you from being locked into low rates for extended periods.
The essentials
CDs can be a valuable part of a diversified savings strategy, offering stability and guaranteed returns. By avoiding these three common mistakes (waiting too long to open a CD, focusing only on the annual percentage yield, and not laddering your CDs), you’ll be well positioned to make the most of the current high-interest rate environment this fall.
