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Saving for a big goal or a rainy day is being smart with your money. When you get to the point where you have a sizable stash — enough to cover 4-6 months’ worth of expenses — that’s a sign that you’ve outgrown your savings account. Because you’re unlikely to need everything at once, you’ll want to put your money into something that will earn you a better interest rate than savings, but without the restrictions that come with something long-term like investments.

One home for your pile of cash is a certificate of deposit, or a CD. A CD is a bank account where you agree to leave a specific amount of cash untouched for a specific amount of time in exchange for a specific interest rate paid by the bank.

A typical CD maturity term ranges from six months to five years. As a rule of thumb, longer terms fetch higher interest rates.

In short, lock in your money, earn a locked-in interest rate! Here’s an example of how it might work:

  • First, you set aside $1,000 to open a CD.
  • Then you select the terms that work for you. For example, let's say you choose the 5-year CD at 2% interest.
  • When the CD reaches maturity, you withdraw the cash and the interest. So on top of the $1,000 you set aside, you’ve earned $104.08.

Benefits of investing in a CD

  • A CD's typically higher interest rates can offer more bang for your buck than the typical savings account or money market account.
  • As a rule of thumb, setting aside more money at longer terms will fetch the highest interest rates. If you think you won’t need the money for five years, your bank may have a special offer so you can get more interest.
  • You can count on the money. Once the money is in the account, the interest rate doesn’t change during your term. Because it’s locked in, you’ll know exactly what your earnings will be.

What happens if you need to close a CD early?

Let’s say that rainy day arrives. Your car breaks down or your water heater needs replacing and you don't have enough cash. What happens if you open the “lock box” and get the cash?

You not only miss out on the interest earnings, but you’ll also pay an early withdrawal penalty. Nothing on the level of, say, the fees and taxes you’d pay for cashing in stocks. But before you commit to a CD, you’ll want to make sure Plan B — tapping the money early — isn’t a cost burden. Read the terms carefully, and have your banker walk through the what-if scenario.

Do CDs make a good investment strategy?

One might call a CD a low-fee investment. It can bring peace of mind, knowing your cash won’t be subject to the ups and downs of short-term market investing.

But when you look at the overall 10-year, 20-year and 50-year gains of stocks, the return you get from a CD return simply doesn’t compare. You’ll miss out on the opportunity to build wealth for your retirement.

Don’t forget to factor in the inflation rate, which shows the changes in the buying power of a dollar from year to year. In 2019, annual inflation came in at 1.81% and in 2018, it was 2.44%. Take a look at the 10-year data, and it’s pretty clear: You’ll be hard pressed to lock in on a CD rate that matches or outruns inflation.

CDs are a great place to keep cash you want to set aside for a few months or a few years. Whether you’re saving for a down payment on a house, a special trip, or building your emergency fund, a CD makes a lot of sense.

Build your CD ladder

Let’s say you have $20,000 and you put it into a 5-year CD. In the meantime, the water heater goes out and you don’t have enough cash to cover it. What happens next is you’ll have to cash your CD in before maturity, and miss out on interest and pay the penalty. You can avoid this unwanted situation by using a ladder strategy with your CD savings.

How does it work? Parcel the money into multiple CDs but stagger the term dates at different intervals. When a CD hits maturity, you can decide what to do with the cash plus interest. You can spend it, put it back in a CD or do a combination.

Let’s show an example of how you might invest your $20,000 in a CD ladder:

  • $4,000 — 5 year
  • $4,000 — 4 year
  • $4,000 — 3 year
  • $4,000 — 2 year
  • $4,000 — 1 year

Every year, when one CD reaches maturity, open a new five-year CD and repeat. Once this system is up and going for a few years, you can take full advantage of the higher rates that come with the five-year term.

The above is just an example; you can parcel the cash into smaller amounts and briefer intervals, if that better meets your needs. One of the benefits of laddering is that it gives you more flexibility to access emergency cash.

Shop around before you choose a CD

It pays to shop around for the best rates so you can park your money and let it grow. Not only that, some banks have special incentives for people who can park their money for a longer period of time. As many savers have discovered, community banks and credit unions have some of the best rates out there.

For example, Minnwest Bank's CD option has something for all long-term savers.

Minnwest Bank’s Classic CD lets you invest as little as $500, with flexible terms and competitive rates. But if you’re saving for a big goal, Minnwest Bank’s Money Manager CD might be the perfect option for you. Here’s how it works.

  • Invest at least $5,000.
  • We’ll grant up to one rate change during your term, so if rates increase, you won’t be locked out.
  • You can add up to half the original CD amount any time during the first six months ($1,000 minimum).
  • Need cash? You can withdraw up to half the original amount one time during the first six months without penalty (after 7 days of opening).

To find current rates, fill out our online form or call a personal banker in your community at Minnwest Bank today. Or see our current Digital CD Specials and open your CD online in under 10 minutes!

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