You already know about the importance of saving for you or your family; however, that’s often easier said than done. Beyond the popular saving and checking account, have you considered using a CD to help reach your savings goal?
While you can set aside part of your paycheck in your primary checking account each month, it may not be the best way to truly grow your savings.
A 2020 consumer financial literacy survey found U.S. adults 18 years and older chose retiring without having enough money set aside and having insufficient “rainy day” savings as their biggest personal finance worry.
Consider a certificate of deposit, or CD.
Certificates of deposit typically carry higher interest rates and can generate higher rates of return. However, you’ll only build up substantial savings as long as you don’t withdraw money early because doing so will lead to penalties.
After all, you’re trying to save money for the long term and can help set aside funds for a car, house or education. If you withdraw your money early, you’ll be required to pay penalties, which defeats the purpose of saving in the first place.
What Is A CD?
You can choose a term that suits your savings need. Common time frames are three or six months, or one or two years. Some CDs have terms as long as 10 years. The longer term accounts typically offer higher yields.
Keep in mind the rates of a CD can change frequently and different terms can require different minimum balances. In order to build a strong savings, look around for the best rates and keep in mind that you can open multiple term accounts.
Because these time-based funds aren’t as easily accessible as a savings account, they may help you stick to your savings goal.
Make The Most Of Your Savings
Before opening a term account, set a savings goal for yourself. Perhaps you’re looking to have enough for a down payment on a house, or you’re planning an overseas vacation next summer. You may be somewhat wary of tying your money up for a long period of time with the potential for rates to rise.
Consider “laddering” your CDs.
What Is Certificate Laddering?
Here’s how it works: Say you have $10,000 you wish to save. Instead of opening one CD, open a one-, two-, three-, four- and five-year term. Set aside $2,000 in each one.
When the shortest CD matures, take that money and invest in the five-year CD at higher interest which will mature in year six.
When the two-year CD matures, invest it in another 60 month, high yield account that will mature in year seven.
A CD ladder allows you to continually invest in a five-year certificate, collect top interest rates and have one certificate mature every year.
Build your own CD ladder depending on your needs to maximize your savings. Ask yourself how much and how long you can afford to invest and if you need an income from the investment.
With approximately 62 percent of Americans not having enough in savings, a CD represents an excellent way to start setting aside money for the future and benefit from the higher yield interest rates. Rest assured that all CD investments up to $250,000 are backed by FDIC.