Certificates of deposit (CDs) are a way to earn more interest on your savings, but the main trade-off is that they require you to keep your funds deposited for a set amount of time, generally measured in months or years. Some savers get skittish at the idea of committing to a CD without knowing when they'll want or need the funds, in addition to being worried about the price they'll pay if they find they can't stick it out.

Fortunately, there are several strategies you can take to lessen the commitment risk and potential penalty hit of a certificate of deposit. That may make you more comfortable with taking the gamble and, in turn, let you reap the rewards of a higher return on your savings.

Strategy 1: Check If Your Timing Is Good

Though CDs can be a smart move at any time, various CD terms can make more or less sense at different times given the general U.S. rate environment. That's because the rate on a CD is fixed, meaning it does not change for the full duration of the term period.

So if, for instance, rates are expected to rise in the future, it's not ideal to lock in a long-term certificate at today's lower rates. A short-term (3 to 12 months) or mid-term (18 months to 3 years) CD would be better in this situation, so you can exit sooner and capitalize on a better rate in the future. On the flip side, if interest rates are expected to fall, a long-term certificate (4 years or more) is an excellent choice, as it will give the CD more time to accrue interest at today's higher rates.

Though it's impossible to fully predict exactly where interest rates will go, their general direction over the coming year is not as tough to decipher. What banks and credit unions pay on CDs and other deposit accounts is directly influenced by the Federal Reserve and what it is doing with the federal funds rate. So some simple internet searching on current Fed news can give you a reasonable indication of whether to expect a falling, rising, or stable rate environment in the next year.

Strategy 2: Only Put a Portion of Your Savings in a CD

One way to lower the chance of needing to exit a CD early is to not put too much into it. Simply decide what portion of your savings you're fairly confident you can live without—for whatever term length you're considering—and leave the rest of your funds in a savings or money market account. That way you'll have ample funds that are easily accessible, should you need them.

A key point in this strategy is not to put your non-CD savings in just any account; rather, you should seek out a top-paying high-yield savings or money market account. By opening an account with a nation-leading rate, you can still earn a very competitive return on your money, while retaining the ability to deposit and withdraw funds when you like.

For added safety, you can also keep a small cash reserve in a traditional savings account at the same financial institution where you have a checking account. This way, you can make an instantaneous transfer to your checking anytime you need to.

Strategy 3: Think Ahead When Choosing Your CD Term

Selecting the right CD term is also important. Given the rate environment, you may want to pick as lengthy a term as you feel you can manage, thereby maximizing the rate you can secure. But it's also smart to avoid overextending your commitment. Think ahead about what's on your personal financial horizon: Will you be buying a house or car? Will you need to start paying a child's college tuition? Do you have a big vacation planned?

You'll never be able to predict surprise and emergency expenses you'll encounter. But it's worth spending a little time thinking ahead about the money needs you can expect to help you choose a CD maturity date that fits into your financial timeline.

Strategy 4: Do Your Homework on Rates and Penalties

Whatever deposit amount and CD term you land on, you will always be well served by shopping around for a nation-leading rate. The yields that different banks and credit unions pay can vary by an astonishing amount. You can see this in the chart below, which shows the current top rates in every CD term vs. the national average rate. In most cases, you can earn three to five times the national average by doing your homework to choose a leading rate.

Seeking out a high-yield CD is about more than just the rate, though. It's also about your resulting return should you need to cash out of the CD early. There will always be a penalty if you don't make it to maturity, so the higher the earnings on your CD, the less damage your penalty will do to your overall return.

For instance, let's say you open a CD paying 3%, but a financial emergency causes you to cash out early. If the resulting penalty eats a third of your earnings, that's equivalent to still earning 2% on that CD, even after paying the penalty. Compare that to a CD paying a dramatically lower rate, like the national average, and you can still come out ahead on the penalized high-rate CD.

The second step is to make sure you know the early withdrawal penalty of any CD you're considering before you commit. Some penalties are fairly mild, some are middle-of-the-road, and some are frankly so harsh they should be avoided. These include any penalty policies that can reduce the principal of your initial deposit.

Instead, you'll want to choose a CD with a mild or reasonable penalty calculation. Typically, these take the form of a number of months of interest that you'll forfeit. By investigating the early withdrawal penalties on a short list of CD options you're looking at, you can choose one that, for instance, charges three months of interest instead of six months.

Strategy 5: Consider Multiple Smaller CDs

Yet another strategy is not to deposit all of the money you've earmarked for CD investment into a single certificate. There are two different ways to diversify here to minimize your risks. One path is to split up your CD deposit into four or five smaller amounts. Say you want to invest $20,000 in a CD. Instead of a single CD at that amount, you could open four CDs of $5,000 each at that same institution. What you gain here is that if you find you need to access some of your CD funds before maturity, you won't necessarily have to cash in the full $20,000. Instead you could just break one or two CDs to get the cash you need, and then you would keep the remaining CDs intact (at least until they mature). Another option is to invest in more than one CD, but not all at once and perhaps not all at one institution. Using the same $20,000 example as above, you could invest $5,000 now, but then plan to invest another $5,000 every month or every quarter. This is a good strategy if you're unsure where rates are going, and it works out well if rates rise. It also staggers your investments and therefore your maturity dates. However, if rates fall, you may wish you had invested all of your funds at once back when rates were higher.

The Bottom Line

It's wise to take a CD investment seriously, since the way to maximize the earnings advantage it offers is to hold the CD until maturity. But by following these strategies, you can significantly reduce the chances of needing to cash out early. And then even if you do, you'll have minimized the costs of the penalty as much as possible.