With CD rates at 5% or higher, I asked a financial planner which kind I should use to earn the most

I've relied on fixed-rate CDs, which have a specific APY for their duration, but that's not the only type. I asked a financial planner about others.

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• I rely on fixed-rate CDs, which have an APY and maturity set when I put my money in them.
• However, variable-rate CDs and no-penalty CDs offer flexibility that may be worth considering.
• Bump-up CDs are another option that would allow me to switch to a higher APY partway through.

At the start of last year, I decided that I wanted to minimize risk in my financial portfolio as much as possible. I was eager to increase my net worth in a steady and predictable way. That's why I decided to move money from investments and my high-yield savings account into CDs.

CD rates were increasing and I managed to secure CDs with rates that range from 4.75% to 5.5% APY.

But as I started to do more research, I learned that there are four main types of CDs to choose from. To make sure I was selecting the right CDs for my financial goals, I met with certified financial planner Christopher Manske, who explained what makes each type of CD different and the benefits of each one.

Understand your current liquidity before picking a CD

Before browsing the different types of CDs and picking the ones you want to go with, Manske advised first understanding your liquidity needs.

"For example, if you have a short-term need, like you plan to buy an expensive item in the next three months, you might look at CDs that will mature by then so you can get your money back to make your purchase," he said.

However, if you have enough cash to pay for the item in three months, or if liquidity isn't an issue for you, then you can go with a CD that has a longer maturity date. Once you have a pulse on that, Manske said you can then decide what type of CD is best for you.

1. Fixed-rate CDs

The type of CD that I've relied on are fixed-rate CDs. Manske explained that those are CDs with a pre-determined interest rate for a set length of time. For example, a CD might offer a 5% APY with a 12-month maturity.

"A common mistake people make with fixed-rate CDs is that they think they will get the stated interest over the length of the CD, but that's not always the case," he said. "CD interest rates are for a 12-month period."

For example, Manske said that if you took out a CD that has a 3% APY for six months and put $100 in, at the maturity date, you won't have $103; you'll have $101.49.

However, Manske said that this type of CD is great for a person who values predictability.

"With fixed-rated CDs, people can know exactly how much money they will earn," he said. "There's no variation or deviation."

2. Variable-rate CD

Because I've been mostly risk-averse with my CDs, one type that I've never tried are variable-rate CDs. Manske explained that these are CDs with rates that are tied to an index, like the S&P 500, and as the index moves, the amount of interest the CD pays out changes. The interest rate can go up and down throughout the CD's maturity.

"It's not as simple as seeing the index up by 10% and thinking your CD is making 10% more," he said. "It's prorated and percentage-based."

Manske shared that people who have a little bit of a risk appetite and are comfortable with the interest rate on their CD going up or down might decide to use a variable-rate CDs.

3. Bump-up CD

If you want a little more flexibility with your CD terms, Manske said you might decide to choose a bump-up CD, which lets you increase the interest rate once before maturity. However, bump-up CDs with longer terms might allow multiple rate adjustments.

For example, if you get a one-year CD paying 5% with the option to bump up, Manske said you can pay attention to CD rates and elect to update it if the rates rise.

However, he doesn't see many people buying bump-up CDs, because they require them to babysit the CD rates and then to go through the administrative process with the bank to change the CD to the higher rate, which can be an involved process.

4. No-penalty CD

For a person who isn't able to lock up their money for a set term and doesn't want to deal with a penalty if they need to take out their cash sooner than the maturity rate, Manske recommended looking into liquid CDs, also known as no-penalty CDs.

"While liquid CDs don't give you as high of an interest rate as other CDs, you are able to pull your liquid out at almost any time," he said. "Usually within a matter of a couple of days of putting money into the CD."

You're able to take out your money from a no-penalty CD without any fees or penalties.

"This CD is usually an option for someone who doesn't have a lot of capital or is in a tight place with their money at the moment," he said. "You can get a little more in a liquid CD than just keeping the cash in a checking account."

After learning about these CD options and thinking about my liquidity for the coming year, I decided to stick with primarily fixed-rate CDs and try out one or two variable-rate CDs to see how my money performs.

This article was originally published in November 2023.