You’ve probably heard about how a Certificate of Deposit – or CD – can help you save money. But what’s the optimal time to open a CD, and when can you benefit most from these super-saver accounts? 

To know when and how to use a CD to the greatest effect, you’ll first need have a good understanding of what a CD is, and how exactly it can impact your savings compared to other interest-bearing accounts.

A CD is a special savings account that carries a higher interest rate than your average savings account. But, in exchange for that rate boost, account owners agree not to withdraw any funds from the account for a specific period of time – typically between 12 and 36 months

“Just like everything, there’s that balance – that give and take,” explained Todd Patrick, Director of Product Management and Financial Performance with First Merchants Bank. 

CD Pros and Cons

For some, the “set it and forget it” nature of a CD is ideal. By its nature, you don’t need to manage or worry too much about a CD – you just wait for the term to be up and that interest to accrue. 

However, some people prefer to ride the highs of a fluctuating interest market. The interest rate on a CD is fixed for the full account term. If the going market rate for interest is below that fixed rate, having a CD is a great way to have your savings pack on some extra padding. But if the market rate is higher than your average CD – something that happened in 2022 and 2023 – it can be tempting to play the market. 

“We had lots of people hold off on purchasing a CD when the market rates were increasing” Todd shared. “Because, at that time, they were seeing increases on their regular money market account. It really just depends on a client’s preference. Some people like to go with the flow of the market, while others like the hands-off peace of mind a CD can bring.” 

Another thing to consider is that, with the vast majority of CDs, once you’ve made your initial deposit you can’t add any more money to your account.  

“With a savings account or a money market account, you can take money out or put money in whenever you’d like,” Todd explained. “But it’s important to remember that once you’ve opened that CD you can’t deposit or withdraw until the term limit is up.”

So, when is a good time to get a CD?

With that in mind, when is the ideal time to open a CD? There are several instances where a CD can add a real boost to your savings – for instance, if you need a certain amount of money within a specific timeline.

“A good time to open a CD is if you know what your timeline is – for example, you need a down payment for a house in about a year,” Todd said. 

Putting the funds you already have saved for your down payment into a CD can help boost that amount and increase your savings when it comes time to close on a house. 

However, a CD is also a good choice for those wanting to add to retirement or long-term savings as part of a diversified, comprehensive savings plan. 

“It’s a great option if you are already on sound financial footing and have a little extra that won’t be missed for six months, a year, two years,” Todd shared. “Used in this way, a CD can really augment an existing savings plan.” 

See if you’re eligible for our CD rate special. 

When NOT to get a CD

If there’s a right time to get a CD, is there a wrong time? Yes, as it turns out. 

“I would not recommend a CD to someone who, all they have in the bank is that minimum deposit amount,” Todd said. “It gets you into a problem where all of your money is locked up. You may say, “Well I won’t need it this year.’ But what if your car breaks down, or you have a medical emergency? Then you can be in hot water.”

While you could withdraw from your CD early, it does come with a penalty.

“It’s usually not an ungodly amount – typically about one month’s interest on the account, I believe – but that’s still hard-earned money you’re losing,” Todd said. 

Instead, Todd advises his clients to work on building up their savings using a regular savings account or Money Market account. Once they have a savings buffer – including roughly six months’ emergency savings – and a little bit extra, then he’ll point them toward a CD. 

Want to know how to build emergency savings? Our experts weigh in.

Other considerations

If you do choose to open a CD, make sure you’re not putting in all your liquid cash – or even all of your savings.

“The key to any good savings strategy is diversification,” Todd said. “You really don’t want to put all your eggs into one basket.” 

And, even if you only have the minimum deposit available to add to your CD, that amount can still add up.

“You won’t see the returns you would on say, $100,000, but even interest on small amounts can add up over time and have a big impact on your long-term savings goals” Todd said. 

Find your rate of return with our CD Interest Calculator

At the end of each account term, you’ll also have the option to “rollover” your CD balance into a new CD – just keep in mind that it may have a different rate, depending on what your bank’s current offerings are. 

Todd also recommends a strategy called “laddering.” What is laddering? Laddering is when you operate multiple CD accounts that end at different intervals. 

“So you’ll have one that comes to term in six months, another in 12 months, another in 18 months, and so on,” he explained. “It provides you with a degree of liquidity since they’re all ending at different times – so all of your money isn’t locked up in the same account for the same time period.”

And, when you’re looking to see which CD is right for you, Todd recommends checking each offerings’ early termination fees, in addition to comparing interest rates.