Affordable CD Investing: 3 Tips for the Budget-Conscious Investor

If you have money you're earmarking for unplanned bills or financial emergencies, then that cash absolutely needs to be housed in a savings account. That way, you'll have access to it at all times.

But if you have savings beyond that and you're looking to earn more interest on your money, then it could pay to open a certificate of deposit, or CD. And now's an especially good time to do that.

CD rates are competitive right now on the heels of the Federal Reserve's multiple interest rate hikes. But since the central bank is expected to cut rates at some point in 2024, today's CD rates may not be around for much longer. So if you're looking to invest in a CD, now's the time.

That said, you may be somewhat limited with the amount of money you can part with. And that's okay. There are plenty of ways budget-conscious savers can capitalize on CDs today. Here are some tips to employ.

1. Find a CD with no minimum, or a low minimum

Sometimes, to snag a competitive rate on a CD, you need to be willing to part with a notable sum of money. Certain banks, for example, might impose a minimum deposit of $5,000 or more to open a CD.

If you're on a budget, look for a bank that doesn't impose a minimum. Barclays, for example, offers CDs with no minimum balance. If you only have a few hundred dollars to put into a CD, so be it.

Other banks may impose a minimum to open a CD, but a fairly small amount. At Quontic, you can open a CD with just $500.

2. Don't commit to too long a term

If you're worried about tying up a lot of money in a CD, one thing you may want to do is stick to shorter terms. Some banks let you open a CD for a term as short as three months, though offers in that range can be limited (meaning, many banks do not offer a 3-month CD).

However, it's very common to find 6-month CDs. And those could be a good compromise if you're worried about losing access to your money for a lengthy period of time.

3. Always ladder your CDs

As a budget-conscious investor, the last thing you want is to lose money to penalties. But unfortunately, when you cash out a CD before its maturity date, you generally risk a penalty of some sort, the exact amount of which will depend on your bank.

At Discover, for example, you'll be penalized three months' worth of interest for cashing out a CD early if its term is less than one year. For a CD of 12 months to under 48 months, the penalty for cashing out early is six months of interest.

A good way to avoid penalties is to ladder your CDs so you have money freeing up at various intervals during the year. Here's what this approach might look like.

Let's say you want to invest $3,000 in a CD. Instead of opening a single 12-month CD, what you might do is open a 3-month CD for $750, a second $750 CD for six months, a third $750 CD for nine months, and a final $750 CD for 12 months. That way, you have a portion of your money freeing up every quarter.

However, one snag you might hit is that not all banks offer 3-month CDs, and they can actually be a bit tricky to find. Also, not every bank offers a 9-month CD, though those tend to be easier to find than 3-month CDs. But it is possible to find banks offering all of these terms. Similarly, depending on your time horizon, you could look at a CD ladder using more spaced out time increments. A popular one is to open a 1-year CD, a 2-year CD, a 3-year CD, a 4-year CD, etc, so that a portion of your funds comes free once a year.

You can ultimately play around with different combinations depending on what your bank offers. And there's nothing wrong with going outside of your current bank if you don't see the CD terms that work best for you.

Also, remember that the CD rates you're seeing today are unlikely to last forever. Once CD rates start to fall, you may want to consider opening a brokerage account and investing some of your money there instead to snag a higher return.

But for now, CDs are still a lucrative bet. And even if you're on a budget, you can still benefit from them in a very big way.