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Are you considering buying a certificate of deposit (CD) as a way to earn more interest on your savings? A CD is a savings account that allows you to deposit a specific amount of money for a set period, or term, and earn interest at a fixed rate. At the end of the term, your account matures, and you can withdraw your deposit plus interest. Most CD accounts require a minimum of $500 to $2,500 to open an account, although some have no minimum deposit requirements.
A major difference between CDs and regular savings accounts is that if you withdraw cash from a CD before it reaches its maturity date, you'll typically pay a penalty. In return for restricting access to your savings, however, CDs typically deliver higher annual percentage yields (APYs) than standard savings accounts. Here's what to know about CD costs, how to save up for a CD and alternative savings options to consider.
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What's the Minimum Deposit Needed to Open a CD?
While you can often open a regular savings account with a small deposit or no deposit at all, most CD accounts require minimum deposits. These can range from $500 to $2,500 or more. However, you can also find CDs with no minimum deposit requirements at all.
Why Do Some CDs Have Higher Minimum Deposits?
CDs that have higher minimum deposits generally offer higher APYs. For example, jumbo CDs may require a minimum deposit of $100,000 or more. There may also be higher minimum deposits for CDs with specialized features, such as step-up or bump-up CDs, which allow you to adjust the interest rate during the CD's term.
Tips for Saving to Open a CD
If you want to get a CD but your bank balance isn't quite there, take these steps to save money.
- Review your recurring monthly expenses. Go over how much you spend each month, and you may be surprised. Typically, you'll find plenty of places where you could cut back. Spending on discretionary expenses, such as entertainment or streaming services, is often the easiest to reduce.
- Set a savings goal. Determine the minimum amount needed to open the CD you're interested in. If you're set on opening a CD even if you have to wait, set up a sinking fund to put aside enough money every month to meet your goal.
- Create a new budget. Make a game out of seeing how quickly you can reach your savings goal. Try creating a bare-bones budget to save faster.
- Automate your savings. Use your banking app to set up automatic transfers from your checking to savings account every payday. Some employers even let you direct deposit part of your paycheck into your savings account. Make saving automatic, and you'll never miss the money you're putting aside.
Alternatives to Opening a CD
Maybe you don't have enough money to open a CD. Perhaps you don't want to tie up your funds for the term required. There are other ways to save money while earning interest. Consider the following alternative savings options.
High-Yield Savings Account
High-yield savings accounts offer the same protections as standard savings accounts but boast higher APYs—currently 4% or more in many cases. To maximize your savings, look for a high-yield savings account with no fees and low or no minimum balance or minimum deposit requirements.
Traditional Savings Account
Ease of access is the big benefit of a traditional savings account. You can take out money without a penalty, although some banks limit you to six withdrawals per month before imposing a fee. Keep in mind, however, that money in a standard savings account won't earn much interest: Currently, the average APY is just 0.40%.
Money Market Account
A money market account combines elements of a checking and savings account. It typically earns more interest than standard savings accounts—an average of 0.59% as of May 15, 2023, according to the Federal Deposit Insurance Corp. (FDIC). It also gives you more flexibility for accessing your money. You can write checks from a money market account, and some accounts let you use a debit card.
The savings accounts mentioned above generally have a variable APY. That means your interest earnings can change as interest rates rise and fall. If you prefer a guaranteed rate, a CD may be the best option.
Whether you choose a money market account, standard savings account or high-yield savings account, protect your money by choosing a bank or credit union insured by the FDIC or the National Credit Union Association (NCUA). Your savings will be guaranteed for up to $250,000 per account holder and account ownership category.
The Bottom Line
Consider interest rates, fees and minimum deposit or minimum balance requirements when determining the best place to sock away your savings. If you're not sure how soon you'll need to access your funds, a money market account, high-yield savings account, or traditional savings account will give you the greatest flexibility. However, if you can leave your money in a CD for three months or more, you could earn interest at a guaranteed rate.
Saving money is just one aspect of your financial health. While you're making a budget to build your savings, make it a habit to check your credit report at least once a year, and consider signing up for Experian's free credit monitoring service to get alerts of important activity on your Experian credit report.