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I have traditionally kept money in savings accounts so I could access it when I want to. Find out why I’m now thinking of buying a CD.
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I have never purchased a certificate of deposit before, but that may change soon. In fact, I am considering moving forward with buying a CD in the coming weeks. Here’s why I’ve decided to branch out into this category of investment.
I finally have some money I’m OK tying up for the short-term
Certificates of deposit require you to tie up your money for some time — typically, a minimum of three months. They generally also require that you make a certain minimum deposit, such as $2,500.
I generally have not been interested in putting money in a CD and facing the risk of a penalty if I need to take it out early. I try to invest the bulk of my money in a brokerage account that can provide a better return than either a savings account or a CD can offer. The only money I have kept in savings accounts is my emergency fund and money I’ll need for short-term purchases that I wanted to keep accessible.
Now, however, I have some money I don’t want to invest because I’ll need it in five to six months to start a remodeling project on a new house I’m buying. And I definitely won’t be taking the funds out until that project starts, so there’s no chance I’d need early access to them.
These conditions are ideal for investing in a CD because I can avoid risking my money (due to the fact CDs are FDIC insured) and I can also get a better return on investment than a savings account alone would provide me. The rates on CDs (and high-yield savings accounts) have been climbing as the Federal Reserve has hiked interest rates to combat inflation. With a lot of money set aside for the remodel, it just makes sense to try to get the highest rate I can in a safe investment. That will come from a CD rather than savings.
Is a CD right for you?
A CD is one option to save for medium-term purchases, along with a high-yield savings account. CDs can often provide you with a slightly better rate than a savings account can, but the tradeoff is that you give up liquidity. You can’t sell a CD whenever you want to because you’d have to pay a penalty. For example, you wouldn’t want to keep your emergency fund in a CD because you don’t know when you’re going to have to take it out to cover unexpected expenses.
On the other hand, if your investing timeline is more than a few years, you can typically earn a much better rate of return by investing in an S&P 500 fund rather than a CD. That means the bulk of your investment dollars should probably be in the market.
Ultimately, the right place for your money is going to depend on what you’re hoping to do with it and when you’ll need to use it. But if you have cash you want to earn a good return on and are OK with locking it up for a few months to a few years, you may want to join me in putting that money into a CD.
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