Saving for holiday expenses using a CD.
It's time to start budgeting for your winter holiday expenses if you haven't already. The Mastercard Economics Institute predicts that holiday season spending will increase by 3.2% in 2024. Additionally, with a late Thanksgiving, there will be fewer days to complete your holiday shopping.
To make the most of your holiday budget, it's important to factor in expenses beyond gifts, such as travel, decorations, family dinners, and activities. To help manage these costs, consider opening a CD that offers a guaranteed interest rate on your savings.
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What is a CD?
A CD is a savings tool offered by banks and credit unions that provides a fixed interest rate for a specific period, making it a secure and effective way to save money. In contrast, traditional or high-yield savings accounts have variable interest rates that can change over time, and you can deposit and withdraw money as needed.
You can typically only make a single deposit to a CD and may face penalties if you withdraw your money before it matures. CDs offer higher APYs than high-yield savings accounts and have term lengths ranging from three months to five years. CDs do not have monthly fees and are insured by FDIC.
Why now's a good time to open a CD
If you open a two- or three-month CD now, you'll have access to your funds in time for the holidays or at least by the time your December credit card statement is due in January. You can use the extra cash from the interest earned during your CD term to stretch your holiday spending power.
You can earn more interest by opening a 12-month CD now for next year's holiday season, but no-penalty CDs have minimum deposit requirements and lower interest rates.
By putting your money into a CD, you can secure a fixed interest rate for the entire term length, giving you certainty about your earnings. Additionally, you'll be subject to an early withdrawal penalty if you access your funds before the CD matures, which will motivate you to leave your money untouched until the end of the term.
During the holiday season, you can use a credit card that offers a high rate of cash back or travel rewards points for your purchases. Then, use the funds from your CD to pay off the credit card in full when the bill is due.
Top short-term CDs to consider
Bask Bank provides a three-month CD with a high APY and a low minimum deposit of $1,000.
Ally Bank, Barclays, and Synchrony Bank are recommended by CNBC Select for their short-term CDs with competitive rates, requiring no minimum deposit.
Your CD rate should remain constant throughout the term of your account, regardless of any fluctuations in APY rates caused by changes in the Fed rate.
Steps to take before opening a CD
To determine your spending target for the holiday season, research costs and review expenses from the previous year.
It's crucial to consider other factors apart from a high APY when choosing a new CD. Although the bank with the highest interest rate may seem like the best option, it's essential to explore other alternatives before making a decision.
Compare the pros and cons of different banks
Whether you prefer a bank with local branches or an online bank for your CD, it's a significant choice. While many people find an online bank suitable for their needs, others prefer a local branch where they can interact with a banker and open their account in person.
To determine if an early withdrawal penalty applies and if there are any minimum deposit or monthly fees, it's important to review the fine print of the account. Additionally, some banks may only provide their advertised highest APY on longer-term CD accounts or those with high minimum balance requirements, so it's crucial to carefully read the terms and conditions to ensure that your expectations align with what the account offers.
Read reviews about several banks
By examining reviews from other customers, you can make a more informed decision when choosing between multiple options. If a bank you're considering has many negative reviews, it may lead you to reconsider your choice. On the other hand, if a bank has many positive reviews, it may stand out among those with average or negative feedback.
Consider the customer service
Before choosing a bank, check if it has high ratings for customer service and if customer service agents are available 24/7. Look at reviews to see what issues or questions other customers have had and how well the bank has addressed them.
When using online banks, it's important to consider the ease of contacting a human representative via phone or if the bank primarily communicates through online channels like chat or messaging.
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