Is there a CD that allows additional contributions?

Question

I've made a budget for this year; after contributing the max to my IRA and 401K ($5,500 and $18,000, respectively, for 2015) I've realized that I have a lot of money that I'll be able to use. As such, I've decided that I want to put away approximately $4,000 per month so that I can have close to $50,000 at the end of the year.

I was thinking that I could put my money in a CD for a year. I know that it's possible to do ladder schemes with CDs, but I want to basically contribute to the CD every month until it matures. Is this possible with a CD, or can I only contribute to a CD when it rolls over?

(Of note, I'm aware that I may not reap the benefits of interest due to the way I would grow the account over time; I'd have the most benefit at the end of the term, for only one month, and at a lower yield than a CD with a higher minimum balance. Unfortunately, I could only avoid this if I were to invest more up front, which at the moment I can't do.)

Answer 1

With a "normal" CD you can't, but some banks do seem to offer CDs where you can. For instance the "variable-rate CD" at USAA allows ongoing deposits. I also found a United Bank "saver CD" which requires you to set up automatic monthly deposits. You would have to check each individual bank's CD offerings to see if they have such a product.

However, if you make ongoing deposits to it, a CD becomes less distinguishable from a savings account. Even if a given bank does offer a "depositable" CD, you might conceivably be able to find a higher rate on a plain savings account at another bank (especially an online bank offering high savings account rates). For instance, the USAA CD I mentioned above has an APY of 0.46%, but the high yield savings accounts on this NerdWallet list have higher APYs than that. So even if you can find the kind of CD you describe, it might be better to just use a savings account anyway.

Answer 2

I've looked around for a while and found one at Broadway Federal Bank. I opened one up last year and will most likely be renewing it if the rates stay fairly competitive.

Here are the features:

• 18 month term
• 1.01% APY
• Minimum $100 deposits
• Penalized when withdrawing (a 1% fee I believe)
• Minimum to open is $50 or $100 (not sure the exact amount)

I think it's a great alternative to a savings account because the ability to withdraw at any time defeats the purpose of "saving". By getting penalized to withdraw with this CD, you are discouraged from withdrawing and hence, actually save.

The biggest downside is that they are a fairly small community bank and only have branches in Los Angeles. They also only have three branches in total and do not have ATM's that you can make deposits into aside from the ones outside of their branches.However, you can open an account online and and make electronic deposits.

Hope this helps.I included their website below.

www.broadwayfederalbank.com

Answer 3

There are many financial reasons why a bank would not want to allow this. While making a note of them does not answer your question, I think it's important to note why traditional CD products do not allow such contributions. Below are two reasons.

1. Say you have a CD earing 3% interest. And then next month the market interest rate goes up and you can buy a new CD with 5% interest. Under your wish, you could choose to add money to your CD or buy a new CD. With the new higher interest you will probably buy the new CD. Now consider the case where interest rates decrease to 1%. In that case, you'd likely choose to invest in your current CD at 3%. In other words, under your proposal the bank always loses, because you only choose to add money when its beneficial to you. Therefore, if this CD were to exist, it surely would have to earn a much lower interest rate than a traditional CD in order to make sense for the bank.
2. Short term CDs have lower interest rates than long term CDs. So say you have a 1 year CD. If say you want to add money to it 6 months in, you shouldn't get the 1 year interest rate that your current CD has, you should get something more like the 6 month rate, because that is how long the CD takes to mature.

If a bank wanted to offer such a product they could hypothetically create mechanisms to account for the above

• making the interest rate variable, not locked in, so effectively the bank gets to adjust the interest rate on your CD through time in some way that matches incentive structures for both you and them
• a contractual agreement that forces you to put a fixed amount of money in every month [this would eliminate concern 1]
• offer this CD but at a much lower interest rate than a traditional CD

And guess what these types of accounts exist ... they are called savings accounts. They allow regular deposits, but often have variable interest rates, charge fees if you don't make regular deposits, or offer interest rates below a typical CD. Note you say you understand what a CD ladder is, but you haven't explained why you don't want to do it. It sounds like what you want is the convenience of a savings account but with the higher interest rate of a CD. Unfortunately, you have to give up a bit of interest if you want this convenience.

Answer 4

Try a "money market" , they pay from day in to day out. For 2019 , Vanguards' averaged 2.14 % ; the rate may change every day. I am unaware of any minimums at Vanguard but there are many" money market" funds and I am sure they have various rules.