One of the ways that you can get a little bit more out of your cash is to use CDs. A certificate of deposit often has a higher rate of return than what you would get for a traditional savings account, and for some other cash products. You can look for high-yield CDs as well, and boost your earnings.
However, CDs do come with different drawbacks. One of them is that, even though offering competitive returns when compared to other cash products, interest earned on CDs are generally low. The other main drawback to CDs is that most of them come with penalties for early withdrawal. (Find the highest CD Rates in 2011).
Early Withdrawal Penalties
When you open a CD, you are promised a fixed rate of return for a set amount of time. You receive this guaranty because you are promising to keep your money in the bank for the term of the CD. The bank or credit union is counting on having that money available to it. So, if you decide to withdraw your money from the CD early, the financial institution will charge you a penalty. You will not get back the entire amount you might expect.
Penalty Free CDs
In order to avoid the possibility of paying a penalty for early withdrawal from a CD, you can look into penalty free products. Penalty free CDs are difficult to find, but they do exist. These certificates of deposit let you take money out of the CD without charging you a fee.
As you might imagine, though, this kind of flexibility comes with a price. Some financial institutions that offer penalty free CDs do not provide them at as a high a rate of interest as you would get with a more traditional CD. As a result, you have increased liquidity, but your returns are smaller. It is a trade off that is common when you are earning interest. There are always trade offs.
If you think that you might need access to your money, but do not want the lower returns that come with penalty free CDs, you can consider setting up a CD ladder. This allows you a slightly more liquid situation, since you set up a series of CDs that mature at convenient junctures, allowing you access to the money without the penalty. You will earn different rates of return on each CD in the ladder, though. But if you set up your ladder carefully, your longer maturity CDs will have higher rates of return, and if you keep the ladder going, potential future interest rate hikes can help you as well.