Maximizing Your Savings with Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are a popular choice for individuals looking to earn a higher return on their savings without taking on significant risk. By locking in your money for a specified term, you can benefit from higher interest rates compared to standard savings accounts. However, it’s essential to understand the nuances of CDs, including insurance coverage and how to choose the best CD for your needs. At O1ne Mortgage, we are here to guide you through the process and ensure you make the most informed decisions. For any mortgage service needs, feel free to call us at 213-732-3074.
Understanding CD Insurance Coverage
One of the primary concerns when investing in CDs is the safety of your money. Fortunately, CDs are generally a safe investment, as they are insured by federal agencies. If you open a CD through a bank, it will typically be insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 per depositor, per institution, and per account type. Similarly, CDs opened at credit unions are usually insured by the National Credit Union Administration (NCUA) under the same terms.
It’s crucial to verify that your financial institution is federally insured before opening a CD account. You can confirm a bank’s status by looking for FDIC or NCUA signs at the office or using the FDIC’s BankFind database or the NCUA’s search tool.
Maximizing Your Deposit Insurance Coverage
While the $250,000 insurance limit is sufficient for most savers, those with more substantial savings may need to take additional steps to maximize their coverage. Here are some strategies:
- Joint Accounts: By adding a joint owner to your account, you can effectively double your insurance coverage.
- Multiple Institutions: Spread your savings across multiple FDIC or NCUA-insured institutions to increase your total coverage.
- Different Ownership Categories: Open accounts in various ownership categories, such as single accounts, joint accounts, and retirement accounts, to extend your coverage.
The FDIC offers an Electronic Deposit Insurance Estimator (EDIE) tool to help you calculate the coverage on your deposit accounts, including savings, checking, CDs, and money market accounts at FDIC-insured banks.
What Happens if Your Bank or Credit Union Fails?
Bank failures, though rare, do happen. If your bank or credit union fails, your money is covered up to $250,000 per depositor, per insured bank, per category at federally insured banks and credit unions. The federal government acts swiftly to protect insured deposits, either by facilitating a sale to a financially sound bank or by issuing checks to depositors up to the insured balance in each account.
If your bank is sold to a new financial institution, your deposit contract with your failed bank is considered void. This means the new bank isn’t obligated to continue offering the same rates and terms on your account agreement. You can choose to open a new account with the new financial institution or withdraw your money penalty-free and do business elsewhere.
How to Choose the Best CD
Before opening a CD account, it’s wise to compare multiple CDs and consider these essential factors:
Type of CD
There are several different types of CDs, so it’s essential to understand how they work and which type best suits your needs. For example, a no-penalty CD allows you to withdraw money from your CD before the end of the term without incurring a penalty, while a jumbo CD offers high interest rates when you make a large minimum deposit, often for $100,000 or more.
Term Length
CD terms vary from as short as one month to as long as 10 years, though the terms you are offered will vary by bank or credit union. Consider your financial goals and needs to determine the best CD term for you. For example, if you have a short-term goal like saving for a home down payment or a vacation, choosing a shorter-term CD might make the most sense.
Interest Rates
Find the best interest rate for your desired CD term by shopping and comparing rates at multiple banks and credit unions. Rates can vary widely depending on the CD term you choose and your financial institution. As of July 2023, average CD rates ranged from 0.20% for a one-month CD to 1.37% for a five-year CD. Annual percentage yields (APYs) tend to be higher with online banks, with many currently offering yields of around 5%.
Early Withdrawal Penalty
When comparing different CDs, consider the early withdrawal penalties charged by each bank if you withdraw money before the CD matures. These penalties can range from 60 days of interest to a year or more of interest. Generally, longer CDs come with higher penalties.
Minimum Deposit
Most CDs require a minimum deposit ranging from $500 to $2,500 to open an account, though some CDs have no minimum deposit requirements.
Federal Deposit Insurance
Consider CDs from banks and credit unions that protect your money through FDIC and NCUA deposit insurance. You’ll rest easy knowing your money is protected up to its limit if your bank fails.
The Bottom Line
If you’ve already built up an adequate emergency fund and have extra money you don’t immediately need, adding CDs to your portfolio could make sense. Opening a CD from a federally insured financial institution protects your money up to each account’s limit. Also, the CD’s fixed rate provides a predictable return if you leave your money in your CD until it matures.
Deposit accounts like CDs can grow your money over time and are key components of your financial health. Your credit health is also essential, as strong credit improves your odds of qualifying for new credit with favorable interest rates. Experian offers numerous resources like free credit monitoring to help you build and maintain strong credit.
At O1ne Mortgage, we are committed to helping you make the best financial decisions. For any mortgage service needs, call us at 213-732-3074. Our team of experts is ready to assist you in achieving your financial goals.
