With CDs topping 5% APY, I asked financial advisors for their best tips to earn more on my savings

• I started investing a lot of my savings in CDs this year when I saw how high APYs are right now.
• I asked the experts how I could improve my strategy and learned I shouldn't stick to just a couple banks.
• I also learned it's not worth the risk to keep my emergency fund in a CD and risk paying a penalty.

At the start of the year, I decided that I wanted to take some of my money out of the stock market and put it into short-term and risk-free investments instead.

During that time, I noticed that CDs were offering high interest rates. I wanted to capitalize on the ability to earn a guaranteed 4% to 5% on my money in 12 months. That's why I made a move to put a big percentage of my assets into CDs with varying terms and interest.

In order to make sure I'm getting the most out of my CD strategy when average CD rates are high, I decided to chat with two financial advisors to hear their best tips.

1. Keep an eye on CD rates

I like to take a very simplistic approach with my finances. Whenever I decide to put money in a new CD, I usually look at the latest offerings from the two financial institutions I have checking and savings accounts with. If one of them seems like it's offering a CD with higher than usual APY, I end my search there and open up a CD with that company.

However, certified financial planner Taylor Kovar recommended that I try a different approach.

"CD rates can vary wildly between banks, credit unions, and investment firms, so be sure to shop around whenever you are ready to buy one," he said.

Rather than just go with the CD rates my current banks are offering, I can start doing more research to keep a pulse on other rates. For example, if I put $50,000 in a CD earning 3% APY at my bank instead of one earning 5% APY from another bank, I could lose out on earning an additional $1,000 that year.

"That 15 minutes of research could mean a big difference in the amount your money makes, so don't just assume your local bank has the best rate," said Kovar.

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2. Don't store emergency funds in CDs

When I shared that I've been putting the majority of my cash assets into CDs lately, including money I had saved for my emergency fund, Kovar suggested that I don't discount any of my other financial goals just to capitalize on high APY CD offerings.

That's because he said if I end up needing the cash inside the CDs, taking the money out early could cost me a significant amount of money.

"While tempting, pulling money out before maturity can eat into your returns with penalties," he said. "The last thing you want to do is have to pull out your CD money right before it matures because you need to purchase new tires."

The early withdrawal penalty for a CD usually depends on the length of the CD and the financial institution's policy, but can range from several months to a year's worth of interest. This helped me realize that I either needed to keep an emergency fund or put that money in a no-penalty CD just in case I needed the cash in the near future.

3. Split up large sums of cash

Since I am considering buying CDs with 5% APY and putting large sums of cash into them, certified financial planner Patrick O'Leary reminded me that it's important to split up the money and perhaps diversify the institutions I buy the CDs from.

"Be mindful of FDIC insurance limits of $250,000 for an individual to have at a financial institution and $500,000 inside a joint account," he said. "These are per institution and not per account or per CD."

I want the money I have in a CD to be mostly risk-free, and I want to make sure the cash is FDIC-insured. That means it could be a good idea to split my assets up and keep them in different banks. I'm going to keep checking and saving accounts in one bank and have CDs with other financial institutions.

4. Consider a CD ladder

In order to really maximize the current high APY offerings from CDs, Kovar suggested considering a CD ladder.

"Split your investment across CDs with varying terms, like three, six, and nine months or even one, two, and five years," he said. "Then as each CD matures, reinvest the money in a longer-term CD."

According to Kovar, the biggest benefit of this strategy is that you're able to lock in higher rates while still being able to access your money at varying times.

This article was originally published in August 2023.