Certificates of deposit (CD) give consumers risk-free returns on their money. While many people ignored CDs during the historic bull market, rising interest rates have made these financial products more enticing.
They offer certainty, zero volatility, and the preservation of your initial investment. Some investors are nervous about how
stocks,
real estate, and other assets will perform in the upcoming years. These same investors may also understand that they lose purchasing power every year due to inflation.
Keeping your money in the bank is guaranteed to hurt your purchasing power, while stocks and real estate can tumble during market corrections and crashes. CDs are a viable middle ground to help people keep up with inflation.
Securing 5% APY on some of the best CD accounts is possible. If you’re new to creating CDs, you may wonder what happens after your CD reaches its maturity date. Financial institutions give their clients a few choices for proceeding with CD rollovers. Knowing your options and their pros and cons can help consumers make better decisions.
CD Rollover Options
Transfer your CD funds to your bank account
Certificates of deposit offer many advantages, but you do have to lock up your money for an extended period. Some people prefer to access their money and move it to a checking or savings account when the maturity date arrives.
You can still earn interest if you put the money into a
high-yield savings account. These accounts make your money more accessible but often have lower APYs than CDs. You may be a few weeks or months away from a big purchase like a house or a car. Having cash ready to go can make it easier to buy those resources.
Transferring your money into a CD can also help during the tax season. Some consumers earmark a percentage of every paycheck for their taxes. This strategy leaves them better prepared for the tax season and can make it more manageable. You can open CDs with maturity dates that correlate with the tax season. For instance, you can set up CDs that mature at the start of March so the funds are ready for Tax Day.
Let your bank automatically renew your CD
Many banks automatically renew your CD, allowing you to save time and not have to monitor your finances continuously. You don’t have to worry about money sitting in your and not collecting interest.
If the bank rolls over the CD for you, the rate may differ. The different rate can be for better or for worse. If interest rates continue to increase, you will likely have a higher rate on your renewed CD. However, if interest rates decline, you won’t earn as much money from the new CD.
This rollover option will not change the CD’s duration. When a 1-year CD matures, the funds will roll over into a new 1-year CD if you let it take place automatically.
Consumers who passively invest their money into index funds or take a hands-off approach may prefer this option. Interest rates will remain elevated for some time, meaning higher risk-free money from CDs. You might get a better deal if you don’t automatically roll over your CD, but it’s more convenient. Some banks do it automatically, but your bank must notify you beforehand.
Pick a CD on your own
Picking your own CD can help you secure more optimal rates and terms for your financial goals. Some people open 2-year CDs to save up for a big purchase. However, if that purchase is coming up in a few months, it may not make sense to roll over into a new 2-year CD.
Turning a 2-year CD into a 1-6 month CD still allows you to earn interest while making the money accessible sooner. You can also pick a CD with a lengthier term if interest rates have gone up. Picking a long-term CD allows you to
lock in a good interest rate for longer.
You can also earn more interest by picking a CD independently instead of letting your bank automatically renew it. Another bank may have a higher APY for the same maturity date. This choice gives you more flexibility and can help you customize a CD based on your finances. However, picking your own CD involves more work and research than letting your bank automatically roll over your CD.
Finding a better CD is also possible by looking at your financial institution’s promotional offer. Promotional offers may have higher interest rates than auto-renewal. The term may also be a year or less, which can help people who want to access their money soon.
Should you roll over a CD?
Rolling over a CD allows you to earn additional interest. If you reinvest your interest payments into your CD, those payments will compound each month. While rolling over your CD guarantees you will make extra money, it isn’t the right move for everyone.
Consumers should assess their short-term and long-term . If you have a big expense in a few weeks or months, putting the CD funds into a checking or savings account may make sense. Locking money into a CD and taking funds out early will result in penalty fees.
You may also want to shop around and compare CD rates before committing to a rollover. You might find better rates and maturity dates if you expand your net and consider other financial institutions. Online banks tend to have higher interest rates on CDs than financial institutions with brick-and-mortar buildings.
Before letting your CD automatically roll over, you should assess the interest rate and see if it is acceptable for your standards. CDs are more attractive now since some of them have 5% APY. However, if the APY drops to 2%, locking your money away for a year won’t be as enticing. Some people are okay with a risk-free return of 2%, but others may want to make riskier investments with more potential.
You can earn more than 2% annually by putting your cash into the stock market. However, this decision comes with a higher risk that isn’t for everyone. Younger investors have more time for their stocks to compound, but older investors seeking to reduce their risk may want to stick with CDs.
Before rolling over a CD, consumers should know their options, risk tolerances, and financial goals. The more you know about your finances and personal preferences, the better you will manage money.
Managing your CDs and making the right call
Certificates of deposit allow you to earn passive income from the money you have accumulated across your bank accounts. Instead of letting your money lose purchasing power in a checking account, you can earn a high interest rate from a CD.
The interest rates on these accounts have gone up in recent years. Some banks automatically roll over your CD when it matures, but an automatic renewal is not right for everyone. Creating multiple CDs and knowing how you want to use each can lead to better decisions and help you make the right call with your accounts.
