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CDs can be a good place to store money for a future home renovation.
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A CD (certificate of deposit) is like a locked piggy bank that pays a consistent return.
A CD is a good alternative to a high-yield savings account if you don’t need immediate access to some of your money.
Setting aside money for a home renovation or future holiday gifts could be good uses for a CD.
Since interest rates are rising, it’s a good time to be strategic about where you save money. Currently, the best CD rates are offering around 4% to 5% APY for terms between one and five years. Some short-term CDs also are offering more competitive interest rates than long-term CDs right now.
A certificate of deposit (CD) can offer good earning potential without any of the risk of a stock market investment or the variable interest rates of a high-yield savings account. Here is what you need to know about CDs and five examples of when you might use a CD.
What you need to know about CDs
When you open a CD, you agree to lock your money up for a specific period of time — usually anywhere from three months to five years — in exchange for a fixed annual percentage yield (APY). You typically can’t access your cash until the CD’s maturity date without incurring an early withdrawal penalty, which makes it a good place to safely grow money that you need at a certain date and not before then. It can also help curb impulse spending.
Quick tip: To learn more about the advantages and disadvantages of CDs, read our article on certificates of deposit.
CD vs. high-yield savings account
If you’re trying to decide whether to save money in a CD or a high-yield savings account, you’ll want to consider how you’ll use your bank account.
You can’t add money to a CD after the initial funding period (usually between 10 and 14 days), so it’s not the right type of account for actively saving money. You can build a CD ladder, which is a strategy where you’ll open multiple CDs of different term lengths to have more liquidity — but it’ll take more effort to maintain than a high-yield savings account.
Ultimately, if you already have cash set aside for a future purchase, a CD is worth considering. However, make sure that you choose a CD that aligns with the timeline of your goal so you don’t end up paying any penalties.
With a high-yield savings account, you can access your cash whenever you want, but the interest rate can change since it has a variable interest rate. A high-yield savings account may also be a better choice for money that you’ll need access to relatively soon.
5 reasons you might save money in a CD for a year or more
1. You’re waiting to buy a house
Saving for a down payment on a home can take years. But just because you finally reach your savings goal doesn’t mean you have to buy a house right away. Maybe mortgage rates aren’t where you’d like them to be or you just haven’t found a place you love yet. If you’ve decided to wait at least a year to buy a house, a CD can keep your down payment safe and earning a consistent return in the meantime.
2. You’re planning a home renovation
If there’s a home improvement project on your to-do list next year, but you already have the cash, consider opening a CD to earmark the savings. As long as the renovation isn’t something that needs attention right away (think: a big leak or a damaged roof), then you can lock in a high interest rate now to earn more on your money while you iron out the details of the project — and actually find the time to do it.
3. You spend a lot during the holidays
The end-of-year holidays seem to get more expensive every year. Make it easier for your future self by setting aside a cash reserve now that you can use next year for shopping, booking travel, and buying gifts. Once your CD matures, you can use the cash to put toward your holiday purchases if the timing is right or replenish the fund you pulled from.
4. You have big travel plans
If you’re actively saving for a travel fund, a high-yield savings account is the way to go. But, if you’ve already reached your goal, or even part of it, and want to make sure the money stays safe until you’re ready to jet off, try a CD. You won’t be able to dip into the account for impulse spending and you’ll wind up with even more money than you started with thanks to above-average savings account rates.
5. You’re preparing for a move
Between packing supplies, movers, and buying new stuff, moving can run up a lengthy tab. But setting up a moving fund? That’s something many of us plan to do, but never quite get around to.
If you know you’ll be moving in the future, whether to a new state or just a new neighborhood, consider setting aside some extra cash in a CD so you can be sure there’s no scrambling for money when the time comes. It doesn’t need to be a ton of cash — some of the best CDs require $0 to open — but you’ll need to add something to start earning a return.