Certificates of deposit – known as CDs – are one of the safest forms of investment savings. With a guaranteed rate of return sheltered from market fluctuations, you typically select the term that works for you and leave the funds alone until maturity.
From here, you can either renew the CD for another term or cash it out and collect the initial deposit, plus all the interest earned.
But what if there was an option that offers the security of a traditional CD, plus the opportunity to take advantage of a rising rate? Good news, there is one – it’s called a bump-up CD.
What is a bump-up CD?
A bump-up CD is just like a traditional CD in all ways but one – instead of one set interest rate in place for the full term of the CD, you have the option to raise, or “bump,” your rate once before maturity to take advantage of a rising rate environment and match a higher rate.
Here’s an example to help visualize a bump-up CD in practice. Say you have a 19-month bump-up CD earning a 3.00% APY and assume you opened it before Thanksgiving.
In the summer, rates go up a little more and you exercise your one-time bump to take advantage. This is then the rate you’ll earn until your CD matures the following year.
What is the advantage of a bump-up CD?
Unlike traditional CDs or a step-up CD, which places rate increases on a predetermined increase schedule at the time of account opening, bump-up CDs allow you take full advantage of rising rates and earn a higher yield without incurring a penalty for closing the CD. Plus, the timing is completely in your control as you’re the one to request the rate increase.
How to decide if a bump-up CD is right for you?
If you’ve decided to utilize CDs as part of your savings portfolio, consider bump-up CDs if you want the stability of a traditional CD, plus the perk of a yield that may increase when the market improves. Furthermore, if you're wondering the optimal time to bump the rate, do it after rates go up so you can earn even more interest for the remainder of the CD's term.
For maximizing wealth-building, try combining savings strategies. First, make a plan for short-term or emergency savings. Then, consider laddering your CDs. This strategy can be very effective with bump-up CDs included. Finally, make sure you have a plan in place for retirement.
OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.
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