The best ways to use a CD account

Savers have a range of different account options to choose from, and each has its unique potential benefits and downsides to consider. For starters, there are regular savings accounts, which offer interest payments on the money held in the account. While some interest is better than nothing, the average rate on these accounts is currently just 0.43%, so they aren’t typically the best option for maximizing the returns on your money.

Luckily, there are accounts that offer higher APYs on your money, like certificates of deposit (CD) accounts. When you open a CD, you agree to leave your money deposited in the account for a specific term — a few months to a few years on average — in return for a guaranteed rate of interest. As such, CDs can be a smart and low-risk option to grow your savings without exposing yourself to the volatility of the stock market. 

And considering how high CD rates are right now, it’s a great time to take advantage of what they offer. But as with any type of financial product, there are some CD uses that make more sense than others. And, it’s important to know what the best ways to use a CD account are in order to make the most of your savings. Get started and find the top savings rates available to you now.

The best ways to use a CD account

Here are a few of the best ways to use your CD account.

To help build your emergency fund

One of the fundamental financial principles is to have an emergency fund. And, a CD account can be an excellent tool for this purpose. By locking your money into a CD with a fixed interest rate and a predetermined maturity date, you ensure that your emergency fund remains untouched, yet it still earns interest. 

Typically, short-term CDs, such as 6-month or 1-year terms, are the most ideal options for this purpose. They provide quick access to your funds while offering slightly higher interest rates than regular savings accounts.

To meet short-term financial goals

If you have specific financial goals that are a few years away, consider using a CD to save for them. Whether it’s a down payment for a home, a dream vacation or buying a new car, CDs can help you achieve these objectives. 

The important factor here is to match the CD’s term to your savings timeline. For instance, if you plan to buy a car in two years, a 24-month CD can be an excellent choice. You’ll earn more interest than you would with a regular savings account while keeping your money safe.

Find out what CD rates you could qualify for here.

To gain the benefits of laddering

Laddering is a popular CD strategy that helps you maintain access to your funds while maximizing your returns. That’s because CD laddering provides both liquidity and higher long-term returns compared to a regular savings account.

When you ladder your CDs, you split it into multiple CDs with different maturity dates instead of putting all your money into a single CD. For example, you could invest in 6-month, 1-year, 2-year and 3-year CDs. As each CD matures, you can either reinvest it in a new CD with a new term or use the funds as needed. 

If you’re looking to generate a consistent stream of income, a CD ladder with staggered maturity dates is a good option. This strategy provides you with predictable income but also allows you the flexibility to reinvest if you decide that’s the better move.

For retirement planning

While CDs alone may not provide the robust growth required for long-term retirement planning, they can be a useful component of a diversified portfolio. Consider allocating a portion of your retirement savings to CDs, especially as you approach retirement age. 

Longer-term CDs with higher interest rates may be suitable for this purpose. They provide stability and can act as a conservative anchor in your investment mix.

To take advantage of what specialty CDs offer

Some financial institutions offer specialty CDs, such as bump-up or step-up CDs, which provide flexibility and the potential for higher returns. Bump-up CDs allow you to request an increase in the interest rate on your CD during its term, while step-up CDs automatically increase the interest rate at predetermined intervals. These options can be advantageous if you anticipate rising interest rates in the future.

The bottom line

CD accounts are versatile financial tools that can help you achieve various financial goals while keeping your money safe. Whether you’re building an emergency fund, saving for short-term goals or planning for retirement, using CDs strategically can be a valuable part of your financial strategy. Just be sure to shop around for the best CD rates and terms, as different financial institutions offer various options and rates — and what will work best depends on your unique financial objectives and risk tolerance.