CDs — they’re great. The caveat? Your money’s locked away.
But what if we told you that you could access another amazing option in the savings world? An option in which you benefited from the solid interest rate of a CD while still having penalty-free access to your savings.*
The answer, friend, is a no penalty CD, where you can store the savings you already have knowing that you can withdraw all your money should you need it.
Hint: Scroll down to our no penalty CD glossary for a quick guide on CD jargon. Also check out our guide on certificates of deposit here if you want more details about CDs overall.
5 things to know about a no penalty certificate of deposit (CD)
So what is a no penalty certificate of deposit (CD) exactly? Well, you put your savings (aka your principal balance) into the CD and agree to leave it there for a specific period of time (the CD term) in exchange for interest.
Your money earns interest until the term is up, then you can withdraw savings (and the interest you earned). But if you need to get your savings out early, you can (although certain rules apply).
If you’re thinking of storing your savings in a no penalty CD, these are the five things you need to know about this unique savings vehicle:
1. No penalty means no early withdrawal penalty
A no penalty CD, as the name suggests, allows you to withdraw all of your money without paying a penalty or fee, even if you withdraw early.* You can generally take out your full deposit and any interest you earned for free with a no penalty CD. Withdrawal rules often do apply, but we’ll get to that.
No penalty? “Freedom!” you might think. But back that enthusiasm up just a bit. Even without the penalty, it’s still best to leave your funds in a CD in order to earn the advertised annual percentage yield (APY). Why? Because a CD is designed to help your original deposit grow over time and help you reach your financial goals. While you still get your original deposit and any interest earned, you lose out on potential interest and the opportunity for future earnings when you close your CD early.
Most banks or financial service providers require an official request and some length of time before you can withdraw — a week, a month, or more. You also, generally, aren’t allowed to withdraw if you only recently opened your CD.
In other words, just because you can withdraw, doesn’t mean you should. But if you’re worried about locking your money away, a no penalty CD provides peace of mind that you can access your savings if absolutely necessary.
2. No penalty interest rates are usually locked in
A no penalty CD’s interest rate is often fixed or guaranteed (aka it won’t change over time). This is a great benefit because, unlike variable interest rates with traditional savings accounts, you don’t have to worry about losing interest if rates in the market drop.
Not only can you choose a no penalty CD with a fixed interest rate, but by agreeing to leave your money for a certain period of time (e.g., from seven days to 12 months or longer), a bank or financial services provider will typically give you a higher interest rate for a CD than a traditional savings account — an excellent benefit considering that the national average savings account rates normally come in at around 0.07% APY. **
It’s important to note, though, that you should compare your provider’s APY - instead of interest rate - in order to choose the best CD rate. APY includes interest, and compounding. The highest APY is the best bang for your buck.
3. You can meet financial goals with no penalty CD
Think about the savings you already have and what you want to do with the money. You could put this money in a traditional savings account, earn a little interest, and have more flexibility for withdrawals. Or, you could place these savings in a no penalty CD and (normally) receive a higher interest rate. Based on national average rates as of April 10, 2020, savings accounts earned 0.07% APY and 12-month CDs earned 0.30% APY.
This means that your initial deposit and the extra you earn (thank you, compound interest) could be used to achieve financial goals later on — goals like buying a car or reaching a house downpayment. Plus, since you know exactly when your CD will mature and your interest rate is locked in, you know exactly how much money you’ll have available for your goal when it comes time to withdraw.
4. You can sometimes open & manage your no penalty CD completely online
Nowadays, many of our daily activities are managed online, whether on our mobile phones or computers. Having the same option with your no penalty CD can be very handy since you can check your account on the go.
Of course, not every bank or financial services provider lets you open an online no penalty CD. But, if you do choose an online financial services provider that gives this option, you can often open and manage your no penalty CD completely online.
In addition to having the option to withdraw online, you can see everything, from the interest you’ve earned to details about your CD’s term, all through your online account — no need to leave the house.
Note: Simple’s No-Penalty CD is entirely online.
5. You can relax knowing that your no penalty CD is protected
As long as your no penalty CD is FDIC-insured, your CD funds are protected up to the legal limits, just like a traditional CD or savings account. This means that your money can grow without you having to worry about losing your hard-earned savings based on outside events.
If you’re unfamiliar with the FDIC, it’s an independent federal government agency. It helps protect your CD’s principal balance AND earned interest (you can learn more about that here). In other words, if your bank or provider were to go under, you wouldn’t need to rush to withdraw your money. Instead, you could breathe easy knowing that your savings are safe.
No penalty, no problem
If you’re on the fence about putting your savings in a no penalty CD, think about the advantages.
The lack of a CD penalty doesn’t give you full rein to draw out your savings anytime you want (it’s much easier to reach your future financial goals if you leave the money alone). But a no penalty CD does give you the the peace of mind that your money can grow safely AND you can get the money out if absolutely necessary.
Simple has a No-Penalty CD that you can get started with for $250.
Principal: The money you put into your CD, minus any interest earned on that money
Term: The length of time that you agree to store your money in a CD.
Interest rate: The amount of money that the bank agrees to pay you for storing your deposit with them.
Fixed or guaranteed interest rate: A fixed or guaranteed interest rate means that the rate stays the same throughout the CD’s term.
Compound interest: CDs earn compound interest, which essentially means that your interest is earning interest, on top of the principal balance.
APY: The acronym stands for annual percentage yield, and it’s basically the total gain your account will achieve within a year (including compounding interest), expressed as a percentage (e.g. 1.01% APY).
Maturity date: The date when you can get your money out of your CD. A mature CD means that you get your full principal balance and any interest.
Early withdrawal penalty: The amount that you agree to pay if you withdraw a portion or all of your deposit early (this doesn’t apply to no-penalty CDs).
* You may not close your Simple No-Penalty certificate of deposit within seven (7) days of opening your CD. After the seventh (7th) day, you may close your certificate of deposit without penalty. Accrued interest is credited on a monthly basis. If you close your CD before accrued interest is credited, you will not receive accrued interest.
** Check it out for yourself here. Based on the April 10, 2020 national average.
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