A CD, or a certificate of deposit account, is one of the many accounts that could help you reach your savings goals. In return for leaving your money untouched for a certain amount of time, you could grow your savings more quickly compared to your more standard savings accounts.
All you have to do is find a CD with terms that align with your savings timeline and let the interest do its job.
How does a CD work?
First, you deposit money into your CD account for a certain number of months or years — this is known as the “term” of the CD — at an interest rate that is usually higher than other deposit accounts. The goal is for your money to stay in the account and earn interest at a fixed rate for the full length of the term. When the term is up and the CD matures, you can withdraw your money (plus interest) or renew or roll over the CD.
Read more: Find the best CD for your savings goals
Term length
A typical CD term can last anywhere from a few months to five years, with some extending 10 years or more. Generally, the longer you're willing to leave money in a certificate of deposit, the better the annual percentage yield, or APY, you're likely to get.
If you withdraw your money earlier than the CD term dictates, you’ll usually pay an early withdrawal penalty (barring exceptions, like Ally Bank’s No Penalty CD).
Interest earned
CDs tend to have higher interest rates than other deposit accounts, making them a great option for short- to medium-term savings. For most CDs, your interest rate is fixed for the full length of the term, meaning it won’t fluctuate with the market once your money is deposited.
Types of CDs
You can find a variety of certificates of deposits with different term lengths and features to fit your specific goals, including:
No-penalty CDs: These allow you to withdraw money, after the first six days, before the maturity date without paying a fee.
High-yield CDs: These usually have higher than average fixed interest rates in exchange for longer terms or a larger deposit. With an Ally Bank High Yield CD, you can start with any amount.
“Bump-up” CDs: This type allows you to take advantage of rising interest rates. Ally Bank’s Raise Your Rate CDs give you the option of a one-time rate increase if our 2-Year CD rate goes up, and a two-time rate increase if our 4-Year rate goes up.
IRA CDs: Take advantage of the tax benefits of an IRA with the security of a deposit account. Ally Bank offers both High-Yield and Raise Your Rate CDs for an IRA.
Benefits and risks of CDs
Certificates of deposit remain one of the most reliable tools for building your balance. With a CD, you typically get:
Higher interest rates compared to other deposit accounts
Fixed rates for fixed terms
Security for your savings through FDIC insurance, up to the maximum amount required by law
Considerations and drawbacks
Before committing, consider these potential cons:
Fixed rates mean you may be stuck with lower APY if rates rise
If you need the money before CD maturity, you may pay a fee to withdraw funds
Benefits of an Ally Bank CD
If you open a CD with Ally Bank, you can guarantee:
APY is fixed for the term of the CD
No minimum deposit to open or earn APY
Interest compounded daily
24/7 customer service
Navigating your CD options
Choosing the right CD requires some thinking about your savings goals. The more specific you can be, the easier it will be to choose the best CD for you.
How to choose the right CD
Determine your goals and how long you want to keep your money deposited. Maybe your top priority is to earn more interest, and you don’t mind locking up your funds for longer. Or perhaps you want a quick earnings boost in the short term. Once you’ve identified your goal, compare options at different banks to find a CD that best fits your needs.
CD laddering
If you aren’t interested in tying up your money for years at a time, consider CD laddering. With a CD ladder, you open several CDs with staggered maturity dates. This takes advantage of better rates, without tying all your money up at once.
How do you open a CD?
You can open a CD at most banks and credit unions. Similar to a savings account, simply set up your account, make a deposit and watch your funds grow. And don’t forget: When you open a CD at Ally Bank, you currently get our 10 Day Best Rate Guarantee and a Loyalty Reward when your CD renews. Plus, there’s no minimum balance to open.
Could a certificate of deposit work for you?
CDs can be a smart strategy to maximize your savings. Whether you’re in it for the APY or the peace of mind that comes with a safe place to grow your deposit, it’s all about finding the right fit to help reach your goals.
