Secure Your Emergency Savings Fund with Certificates of Deposit
We’ve all heard that we’re supposed to have money put away for a rainy day. However, the traditional method of putting “extra” money into a savings account has several drawbacks.
First, the typical interest rates on these accounts are lower than inflation, resulting in a net loss on the value of your money.
Second, the ease with which you can access your money when “needed” becomes a major drawback when you withdraw money for things you “want.” This can result in frequent “savings account raids” that deplete your emergency funds.
Instead of savings accounts, consider purchasing certificates of deposits (CDs) as a useful financial tool. They generally provide better returns than savings accounts and they are not as easily accessible. Here are some tips to keep in mind.
- You usually need a minimum of $500 to purchase a CD. So, keep your emergency funds in a savings account until you can purchase a $500 CD.
- CDs have terms that, if not met, result in financial penalties. A 6-month CD “matures” after six months and automatically renews for another six months. If withdrawn prior to the end of the term, you will pay a penalty fee, which may equal part or all of the interest earned during the term. Conversely, if your money stays put the entire term, you can expect sometimes as much as twice the return on your money as a regular savings account.
- Check out CDs online for the best rates. Even “brick and mortar” banks often offer better CD rates through their online branches.
- Above all, CYCLE your CDs. Initially, you may only get one $500 CD with a 3-month term. When you can afford to do so, purchase two more 3-month, $500 CDs so that each month, one of the three is maturing and can be accessed without a penalty fee if need be. As your emergency fund continues to grow, change you $500 CDs into $1,000 CDs. Over time, you may be able to add three more CDs and have them all cycling through a six month period. In this way, each month, you’ll have a CD mature and can access a large emergency savings fund without penalties while also earning above-inflation returns.
If keeping all your money in cycling CDs makes you nervous, you can always keep a portion of your savings in a high yield savings account to be sure it is always accessible. The important thing when approaching savings isn’t necessarily the method used to do it, it’s building the HABIT of putting money away regularly.
Create a strategy for your savings today and enjoy watching it grow into a cushion that provides you with peace in any hard times that may lay ahead.
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