A Simple Guide to Making Money With CDs

A CD -- short for certificate of deposit -- can be a great place to park your mid-term savings. (Note: This is not your emergency fund. You want that liquid. We're talking down payment savings or similar.)

And that's especially true right now with rates so high. Here's a quick guide on the best way to take advantage of high-yield CDs.

Before you open a new CD

There are three main things to consider when getting a new CD.

1. The minimum deposit

Most CDs have a minimum deposit limit, which is the lowest amount of money you can deposit to open that CD. If you can't meet the minimum, you'll need to look for a different CD.

In general, accounts with the highest rates tend to have the highest deposit requirements -- but this isn't a hard-and-fast rule. You can still find very competitive rates with lower (or no) deposit minimums.

2. The APY

The best way to maximize your CD earnings is by looking for the highest APY (annual percentage yield). So, before you open an account, it's a good idea to look around to see which bank or credit union will offer you the best CD rates.

If you're lucky, your current bank will have competitive rates. However, you may need to look into an online bank or your local credit union to get the best APY.

3. The maturation term

Most CDs (no-penalty CDs are a rare exception) have a time period during which you can't withdraw any money without paying early withdrawal penalties. A CD that hits the end of that time limit is said to have "matured."

For example, a 12-month CD takes 12 months to mature. If you withdraw your money before those 12 months are up, you'll pay a hefty penalty, usually amounting to a certain number of months' worth of interest.

Make sure you choose a term that meets your timeline. Don't open a CD with a maturation term longer than you can afford to go without that money. Which leads us to...

During the life of your CD

The only real rule here is: Don't touch it.

Seriously, don't even think about that money as existing. For all intents and purposes, that money disappeared when you opened the CD, and it will magically manifest anew on its maturation date -- with its good friend, interest income.

What's the big deal? CDs have very expensive early withdrawal penalties. We're talking up to half of your interest earnings. That definitely defeats the whole purpose of the CD in the first place, which is to make money.

CDs vs. high-yield savings accounts

If you're at all worried you might need access to your money during the maturation period, don't get a CD. Get a high-yield savings account instead.

Rates right now are so good you can easily find high-yield savings accounts with rates directly comparable to most CDs. Online banks, in particular, tend to have excellent rates on savings accounts.

Moreover, savings accounts allow you to move money to and from the account (mostly) at will. (Some banks limit you to six withdrawals a month from a savings account; this is a holdover from pre-COVID-19 Regulation D rules.) This not only means you can get to your funds at any time, you also can add funds to take advantage of the high APY on additional savings.

Once your CD matures

When your CD hits its maturity date, it will typically be automatically rolled over into a new CD with the same term. For instance, a 6-month CD will roll over into a new 6-month CD, and a 3-year CD will roll over into a new 3-year CD.

You'll have a seven- to 10-day grace period to withdraw your funds with no penalties. If you don't take out the money, it will be locked into the new CD. (The exact amount of time you have will be listed in the terms and conditions of your CD.)

When you should withdraw

If you're going to need your money before the new CD would mature, withdraw your money during the grace period. You can then put it into a shorter CD, or place it in a high-yield savings account until you need to use it.

You may also want to withdraw your money if you've found a better rate elsewhere. For example, if you originally signed up for a promotional CD rate, it will likely renew at a lower rate. It's definitely worth taking the time to compare rates before the grace period ends to ensure you're not missing out.

When you should rollover

Provided you don't need the money and the rate is still competitive, leave it alone. The money will continue to compound and grow while you go on about your life. Easy peasy.

CDs can be a great place for your short- and mid-term savings. As long as you play by the rules, they're a low-risk place to grow your money.