Understanding and using banks

Certificates of deposit (CDs)

When you have amassed $500 or more in your savings account that you know you will not need to access or spend in the next 6 months or so, it is time to consider getting certificate of deposit (CD). A CD is basically a special kind of savings account. You agree to leave the money on deposit for a certain amount of time, many times 6-12 months, and the bank agrees to pay you a fixed interest rate on it for the entire agreed time period.

You will find that this interest rate is higher than the rate you get in exchange for giving up immediate access to your money. Typically, the longer the CD term, the higher the rate of interest you are paid on it. Sometimes your bank will pay even more if you are setting aside particularly large amount of money in the CD. This would mean more than $10,000.

While you are agreeing to lock up your cash for a while, you can still get access to it if you need to, but that comes with consequences. If you break your agreement with the bank on the CD, the bank will obviously charge you a penalty fro early withdrawal. This usually means that you will not get the full interest agreed upon originally.

In order to minimize the chance of having to access the CD early, never lock any amount of money into a CD that you think you could need for an emergency. Meaning, if you a holding this CD money aside for a down payment on a new home, down the line, just be certain that if you need the money, the CD matures in time. Fore instance, if you are planning on buying a home in 3 years, do not get a 5 year CD even if you are tempted by the higher rate it returns.

Some people put their emergency money into a series of CDs. This way, one is always maturing if they are staggered out. Say you have amassed $2,000 in your emergency fund; you might take out $500 of it and put it into one CD that matures in a year. Three months later, you take out another $500 from your emergency fund and put it in a CD that matures in one year, and you continue this every three months until you have 4 $500 one year CDs. This way, you will have a CD maturing every 3 months should you need it – and each one is earning much more interest than your typical savings of $2000 was. All the while, you are still adding to the original $2000 savings a little each payday to keep it going.

Since you are adding money to the original savings each paycheck, you will still have a few hundred dollars in your savings account even after you buy the 4 one year CDs. So, when the first CD matures after a year, you will get a notice stating that you have like 10 days to withdraw that CD money or it is automatically renewed. So, when the first CD matures after a year, you will get a notice stating that you have like 10 days to withdraw that CD money or it is automatically renewed. You then have time to consider whether you think you have any impending money issues in the next three months (remember you have another CD maturing in only 3 months) that will need money taken for the mature CD. If the hot water heater ids running well, the septic tank is good to go and your car is running well, let the CD renew for another year. Again, you have another maturing in just three months – and every three months there after for that matter.

Even if you did have an emergency in that next three months, you would have that few hundred dollars you are still contributing to your regular emergency savings each paycheck and if you did have to take a bit of the next maturing CD, it is a worthy gamble. There are many ways you can scrape together $100 in order to not have to access that CD too. This is smart money management and a worthy consideration for all of you to make in your financial life.

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