The money I’m saving for emergency expenses like home and car repairs is cash I’m leaving in a regular savings account. I can’t put that money into a certificate of deposit (CD) because I might need it at any time, and CDs force you to keep your money in the bank until they mature.
But thankfully, I have savings outside of my emergency fund. Normally, I’d invest more of my money. But because CDs are paying generously these days, I’ve opted, for the time being, to keep more cash in the bank.
The way I see it, CDs give me a risk-free return on my cash, whereas with stocks, I could lose money. It’s not worth it to me to forgo the higher return I might get in a brokerage account when CDs are paying 2% interest. But right now, I’m earning upward of 5% interest on most of my CDs, which have a one-year term. To me, that’s reason enough to stick to CDs until rates start to fall.
But the money I have in CDs is in, well CDs — as in, plural. I could’ve simply taken all of my money and opened a single CD, but instead, I opted for six. There was a very good reason for that decision, though.
It’s all about having options
I bank at Capital One, and the penalty for cashing out a CD with a term of 12 months or less before it comes due is three months of interest. I’m not very eager to lose interest income because that’s the whole point of opening a CD in the first place.
But I also know that sometimes, things happen. I may end up in a situation where I need more money than what my emergency fund contains. So I want to make sure I’m leaving myself with options as far as my CDs go.
Instead of opening a single 12-month CD, I took the money I wanted to put into a CD and divided it into six pieces. I then opened six different 12-month CDs, with each one set to mature about two months after the next. This way, I gain access to some of my money every couple of months instead of having to wait 12 months.
For example, one of my CDs is coming due very shortly. If my circumstances don’t change in the next couple of weeks, and if I’m still happy with the interest rate my bank is paying, I’ll roll that cash into a new 12-month CD. If I decide I want the money for something else, I’ll close out the CD and get that money transferred into my savings account. It’s that simple.
Laddering CDs is a smart bet
The strategy I’ve described above for my CDs is called CD laddering, and you don’t necessarily need to do it to the extreme that I do. In other words, you may find that having six different CDs is too cumbersome, especially since it’s important to keep track of when your CDs are coming due. So if you’d rather limit yourself to three or four CDs, that works, too.
The key, however, is to set yourself up so you have money coming due at different intervals during the year in case you wind up with a need for cash. It’s a good way to lower your risk of being penalized by cashing out a CD ahead of schedule. And it might also make the idea of tying money up in a CD a lot less scary, especially if that’s something you haven’t done before.
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