Four Factors to Consider When Youre Ready to Buy CDs (Certificates of Deposit)

Weighing Options When You Buy CDs

October 2012

Certificates of deposit (CDs) can be a great way to save.

And once you've decided that you want to buy CDs, there are four factors that can help you pick out the right one for you:

  1. Your goals

    This should be the starting point when you decide it's time to buy CDs. CDs especially are appropriate when you want to put money away for something specific - something that takes place at a predictable time (think your children's' education, their weddings or even your own vacation) because you're insured up to the maximum allowed by law (when you choose an FDIC-insured bank like Ally Bank) and you'll likely know precisely what you will earn. But people also buy CDs for less specific purposes as well. Whichever is the case for you, knowing your goals can help make your choices clearer when you buy CDs.

  2. The term of the CD

    The term of your CD lets you know when your CD will mature and you'll be able to withdraw your money - without penalty. A CD may have a term of a few months or several years (or anywhere in between). Some CD terms are even as short as a week. In general, you want a term that is longer in order to get a higher rate, but not so long that it doesn't match your goals for availability of funds. "The term is probably the most important factor to consider, since you do not want to lock up your money past when you will need it," Robert Schmansky, founder of Clear Financial Advisers in West Bloomfield, Michigan, told Ally Bank in a recent interview. "You should consider whether you have enough [other] money that is liquid and available in savings or other maturing CDs when deciding the length of your CD purchase."

  3. The Annual Percentage Yield (APY)

    People often look at just the interest rate or annual percentage yield (APY) when they want to buy CDs. But the APY can tell you much more. Essentially, the APY calculates the combined effect of the interest rate and the compounded interest you earn. With a given interest rate, the more frequent the compounding, the more you earn - and the higher the APY.

  4. Penalties

    Traditional CDs typically have an early withdrawal penalty that you must pay if you take the principle out before a CD's maturity date. These penalties vary widely, so it's a good idea to compare before you buy CDs. Of course, it's best to plan ahead as much as possible to avoid having to take money out early. "While penalties are important to understand, you generally should think [about having] enough cash to cover everything but large emergencies available in savings or other maturing CDs," said Clear Financial Advisers' Schmansky.

Once you understand these factors, look at your options. And once you take this step, you'll find that you actually have a number of choices you can make. So when it comes time to buy CDs, you should be able find one that meets your goals and needs.

Ally Bank, for example, offers not only traditional, high-yield CDs, but also the Raise Your Rate CD. With these 2- or 4-year CDs, if you notice that our current APY goes up, you have the option to request a rate increase - one time with the 2-year IRA Raise Your Rate CD and twice with the 4-year version. Plus, there's the Ally No Penalty CD, which gives you the option to withdraw your entire balance - including interest - whenever you want, provided your withdrawal happens after the first six days after you fund your account.

Learn more and even buy CDs online at or give customer care a call at 877-247-ALLY (2559), where live help is available 24/7.

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