Guest blog post by Damaris, Olaechea, NerdWallet
Certificates of deposit (CDs) generally offer higher interest rates than traditional savings accounts, without the volatility involved in the stock market, making them an excellent choice for short to long-term savings. The trade off is that you have to tie up your investment for a specific time period and may face hefty penalties for early withdrawals. Since you can’t touch your money until your CDs mature, you may be wondering: when are the best times to purchase a CD? That all depends on how you plan to use the money you earn.
Before even starting to explore specific times to purchase CDs, understanding the concept of laddering is essential. The term laddering refers to buying a number of CDs that mature over different periods of time instead of locking up your whole investment with a single CD. To keep funds liquid, you might divide a $10,000 investment like this: $2,000 in a five-year CD, $2,000 in a 4-year CD, $2,000 in a 3-year CD, and so on. If you don’t need the cash when shorter term CDs mature, simply reinvest them.
Another laddering approach is to purchase an initial long-term CD and then buy additional shorter-term CDs each year so all investments mature together when needed. For example, you might invest what you could in a 10-year CD, and then over the next 10 years purchase additional CDs with increasingly shorter terms. This approach allows you to invest gradually, rather than experiencing a dramatic loss of available cash.
While you’ll never go wrong by investing at an earlier date, a realistic time to begin purchasing CDs to cover wedding costs is when you become engaged, generally a year or two before the wedding. Use a laddering strategy by purchasing a combination of CDs ranging in terms from a few months to a year or more.
Your first home
One of the biggest obstacles to home ownership is coming up with a down payment. The time to buy that first CD to help you buy a home is as soon as you’re financially independent enough to handle home ownership. Plan to invest and save for three to five years or more in order to accumulate enough for that first down payment.
A comfortable retirement
Retirement is much like education in that it requires long-term planning. As soon as you’re out of school and working, begin to earmark some of your CD purchases for retirement. Choose a variety of long and short-term CDs for the best yield. During periods when interest returns are low, go with short-term CDs that can hopefully be reinvested at higher rates down the road. When interest rates are high, aim to lock in the savings with long-term CDs.
The best time to invest in an emergency fund is now! Most financial experts recommend setting aside enough money to live on comfortably for three to six months in the event of a job loss, accident or illness. Having enough to survive on for a year is an even better plan. When laddering for emergencies, stagger CD maturity dates and include enough short-term CDs so that funds will be available quickly when needed.
CDs provide an excellent way to prepare for life’s milestones and surprises. Be sure to protect yourself by reading all conditions carefully, and choose the most effective option for your financial life.
All content contained in this blog post is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerance and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this blog post are opinions of the particular author only.