Certificates of deposit (CDs) allow you to earn interest on your deposit, sometimes at interest rates as high as 4% APY. This helps hedge against inflation, making them an attractive alternative to checking accounts and traditional savings accounts.
However, checking and savings accounts let you add money at any time. With CDs, adding money is often not permitted — with one exception.
What is a CD, and how does it work?
A CD is a type of interest-bearing deposit account available at most banks and credit unions.
Unlike traditional savings accounts, CDs require depositors to keep their money in the account for a set period of time. In exchange, customers are rewarded with a guaranteed interest rate on their deposits. CD terms can range from just a few months to several years. If you withdraw your money before the CD matures, you’ll be subject to an early withdrawal penalty.
Typically, the longer the CD term you choose, the higher the interest rate offered. Financial institutions tend to pay higher rates on longer CD terms to incentivize customers to park their money in their accounts longer. This allows them to lend deposits to other customers, and longer terms make their funds more stable and predictable.
However, this isn’t always the case. CD rates are influenced by market expectations for future interest rates. So, if banks and investors expect interest rates to fall in the future, short-term CDs may offer higher rates than long-term CDs. This is called an inverted yield curve.
Can you add money to a CD?
Most CDs don’t let you add money once the account has been opened and funded. With traditional CDs, you must leave your money in the account until maturity. Once the account matures, you can open another CD and add additional money to that account if you want.
One exception to this rule is with add-on CDs. This is a special type of CD that lets you add more money to the balance after it’s opened. Some add-on CDs have low opening deposit requirements, allowing you to open the account with the funds you have available and then add more at a later date.
Keep in mind that while add-on CDs let you deposit more money into the account, they likely won’t permit early withdrawals. Additionally, the interest rates on add-on CDs tend to be lower than the rates for standard CDs.
Alternatives to consider
Given the downsides of add-on CDs, there are other options to consider if you want a secure place to add savings while earning a competitive interest rate.
CD laddering
This is a strategy that can help you work around traditional CD deposit rules. CD laddering involves opening multiple CDs and spreading your funds across different accounts with staggered term lengths.
For instance, rather than depositing $6,000 in a 1-year CD, you could open three CDs with varying terms — say, 3 months, 6 months, and 9 months — and deposit $2,000 into each one. Every three months, you’ll have access to a portion of your funds, at which point you can decide whether to open another CD (and potentially, add more funds) or reevaluate how you want to use that money.
This is a particularly good strategy when interest rates are in flux and you don’t want to lock in your funds for too long.
High-yield savings account
For the most flexibility, consider a high-yield savings account. You can add money to these accounts whenever you want, and some pay interest rates that rival CDs. In addition, they often have low or no minimum opening deposit requirements.
However, high-yield savings accounts may have a limit on the number of monthly withdrawals you can make without incurring a fee.
Money market account
Another possible alternative, money market accounts have features of both checking and savings accounts. They can offer similar rates as high-yield savings accounts and CDs, and often come with a debit card and checks. You can deposit money as often as you want, but like savings accounts, there may be limits on withdrawals.
