Once you've built up an emergency fund in a traditional or high-yield savings account, it may be worth considering putting any additional cash into a different type of savings vehicle: a certificate of deposit (CD).
Similar to other savings accounts, CDs allow you to set aside your money to grow over time. There are a few perks of using a CD: You lock in a fixed interest rate (meaning the rate won't fluctuate with the market), and you're incentivized not to touch your savings.
Typically, you can't access your funds for the length of your CD's term without paying some type of penalty fee. This helps encourage you to save — and why it's also important you don't put money in a CD that you need easy access to (like an emergency fund).
But before you go depositing your extra cash into a CD, know what to look out for. Here are the five factors to pay attention to when picking the best CD account for all your savings goals.
1. CD term length
When choosing a CD, you have to decide how long you want to commit to locking up your money.
CD term lengths vary, ranging between three months and five years. The length of your CD term is a crucial factor because you typically cannot withdraw your savings, or make any additional deposits, until your CD term is up. If you need to access your funds before the term ends, also known as its maturity date, it will cost you an early withdrawal penalty fee.
Once your CD matures, you can get your money back, in addition to the interest earned over time, or you can choose to move the money into a new CD.
Usually, the longer the CD term, the higher the rate of return offered. While a high interest rate is important, it's not worth opening a three- or five-year CD to score a high rate if you think you will need access to your money sooner.
2. Higher than average interest rate
Once you choose your CD term, you will want to shop around for the banks offering the highest interest rates, or annual percentage yields (APYs), for that CD.
Take note that the APYs offered by online banks far outpace those offered by most national brick-and-mortar banks.
According to the FDIC, the national average APY on one-month to 60-month CDs ranges from 0.05% to 0.35%, respectively, for deposits under $100,000. Look for a CD that matches the term you want and offers an APY greater than the national average.
To do some of the work for you, CNBC Select researched the best CD accounts and found five with different term lengths that each offer an APY more than double their national average.
Here are CNBC Select's picks for the top CDs:
- Best three-month CD: BrioDirect High-Rate CD
- Best six-month CD: iGObanking High-Yield iGOcd®
- Best one-year CD: CFG Community Bank CD
- Best three-year CD: First National Bank of America CD
- Best five-year CD: Ally Bank High Yield CD
3. Minimum deposit requirement
Most CDs require a minimum deposit to open an account and start earning interest. (The Ally Bank High Yield CD is one exception that does not have a balance requirement). Before choosing a CD, make sure you know what the minimum is. Deposits can range drastically, but they are usually $500 and up.
You can only deposit money into your CD once at the beginning of the term, unless it is an add-on CD. (Learn more about different types of CDs.)
Because you can't make additional contributions over the course of your CD's term, you may want to consider depositing more than the minimum if you have the cash to do so. Generally, a larger deposit in a longer term CD with a higher interest rate will earn you the most money.
4. Early withdrawal penalty fee
CD savers can't access their money before the term ends or they will get hit with an early withdrawal penalty.
Penalty fees can vary depending on your bank and your CD's term length, but it's usually the interest earned, or the interest that you would have earned, over a certain number of days or months. Generally, the longer the CD term length, the costlier the withdrawal penalty.
Read the fine print to find out what your early withdrawal penalty fee would be (though we don't recommend opening a CD if you think you'll need immediate access to the money you deposit).
Some penalties are less strict than others. For example, if you withdraw your money early from an iGObanking High-Yield iGOcd®, you could get hit with a penalty fee equal to three months of simple interest (versus compound interest) on the amount you withdraw. Some banks make users pay all the interest earned during their CD term, even if that means dipping into the principal.
Note that CDs typically don't come with monthly maintenance fees like other bank accounts often do.
5. FDIC insurance
Make sure the bank offering the CD is insured by the Federal Deposit Insurance Corporation (FDIC). Thankfully, it's not hard to find good CDs that are FDIC-insured up to the standard $250,000 per account holder. (If you are opening a joint account CD with a spouse, the insurance limit is doubled.)
This means that if the bank where you have a CD were to suddenly collapse (which is rare), the FDIC insurance would cover you so that you're reimbursed up to the maximum amount, and you don't lose your money.
