If you ever check out your bank’s offerings, you have probably seen that your bank offers CDs or Certificates of Deposit. I used to be really big into using CDs as part of my savings plan, but that has changed over the years. That said, with current interest rates as they are, it’s time to take another look into saving with CDs.
What is a CD?
Now obviously, we’re not talking about music CDs. CDs are Certificates of Deposit. Essentially, you deposit a set amount of money for a set amount of time, and you earn a specified amount of interest on the amount. These almost always have higher interest rates than a standard savings account because you are committing the money for that specified amount of time.
So I’m locking away my money?
Yes and no. If you put your money into a CD, to receive the interest, you need to keep the money in the CD for the set amount of time (often anywhere from 3 months to 60 months). But if you find you need the money sooner, you can retrieve it, but you will pay a penalty, usually a set number of months of interest. So should an emergency arise, you can always get to your money, you just might pay a slight penalty.
What about CD Ladders?
I used to regularly use CD ladders for my savings. Essentially, every three months, I would put one quarter of my savings into a 12 month CD. Once I bought the fourth CD, I would have one quarter of my money coming up available every three months, or I could roll it (plus the interest) into a new 12 month CD. You can also do this at one time by buying a set of CDs – 3 month/6 month/9 month/12 month. This is a great way to always have money coming up available. I preferred the 3 month plan, but some people will actually setup 12 different CDs with their savings, so every month, they have money available if needed.
Why are CDs good again?
CD rates, like savings rates, go along with the Federal Reserve’s interest rates. When interest rates are low, CD rates are low. So as interest rates have been low over the past number of years, CD rates have been so low that a lot of people didn’t find them worth the effort. In many cases, the rates were matching those that you could find in savings accounts. But as interest rates have risen, so have the accompanying interest rates for CDs.
For example, right now, if I take $5000 and put it into a 12 month CD at Capital One, which is offering 4.15% right now, at the end of those 12 months, I’ll have earned $208 on that $5000, much more than I would earn if it continues to sit in a savings account at 0.3%. Yes, I’ll have to lock away my money for 12 months, but that is money that is in savings and that I don’t plan to spend. Should a complete emergency arise and I need it, well, my situation is bad enough that losing the small amount of interest is a small hardship compared to what I happen to be going through.
So I’m going to take a look at saving with CDs and setup some CD ladders and try to build the strength of my savings once again.
Read More:
Megan is a 40-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.
The safest way of funding your retirement. I’m a big fan of CDs ! And with interest rates in good numbers now you can’t go wrong with them. my grandfather retired with CDs no stock market just CDs. He Said too me that nothing better than safe kiddo! So I guess I’m biased.