Life can be unpredictable. From the job market to gas prices and the ever-increasing cost of groceries, there’s been no shortage of monetary hurdles that have impacted the lives of Americans over the past few years. Inflation has become a growing concern for Americans. In fact, according to an American Psychological Association poll in March of 2022, adults rated inflation as a top source of stress compared to other stressors.
One way to manage the stress that arises as a result of inflation is to prioritize financial wellness. So, what exactly is financial wellness? It’s taking control of your day-to-day finances. It’s being prepared to handle financial shock. It’s setting financial goals and meeting them. More than anything, it’s the freedom to make choices that allow you to enjoy your life.
With that definition in mind, you may be wondering how you can improve your financial wellness. There are many different approaches. The secret is to find a strategy that works best for you and get started. And no matter who you are, the path to financial wellness starts with savings.
Whether you’re saving for a big future purchase or just want a rainy-day fund in case of emergencies, there’s a savings solution for you. You just have to figure out your savings goals and decide what type of savings option best meets your needs. To help you get started, we’ll compare two of the most popular options: traditional savings accounts and certificates of deposit (CD).
What Is a Traditional Savings Account?
A traditional savings account is exactly what it sounds like — an account where you deposit money to save it. You can deposit into and withdraw from a traditional savings account anytime, and you can even set up a regular deposit from your checking account to help you consistently save. However, it’s best to view a traditional savings account as a goal you’re trying to reach rather than consistently withdrawing money from it.
There are several benefits to opening a traditional savings account. First, it’s a great way to work toward your financial goals. While you can withdraw anytime, you can’t have a debit card connected to your account, so the money is not as accessible as your checking account. Second, your money is safe and insured in the event that something happens to your bank. Third, you can make a withdrawal at any time, so you’re able to use your savings for emergencies. Traditional savings accounts have the fewest withdrawal restrictions.
On the downside, traditional savings accounts tend to have lower interest rates and can require fees to open and maintain them. Also, a traditional savings account doesn’t guarantee the same interest rate forever. So, the amount you earn from your savings account may fluctuate.
When should you use a traditional savings account? Having fewer withdrawal restrictions makes traditional savings accounts the best for saving money you may need in a pinch. Traditional savings accounts are also good for building savings over time because you can make regular deposits into your account.
What Is a Certificate of Deposit?
If you like the idea of a savings account but don’t think the returns of a traditional savings account meet your needs, a certificate of deposit (or a CD, as they’re often called) may be just what you’re looking for.
If you want your money to make money, a CD can be an excellent option. A CD is a lot like a savings account. It is an account that earns interest — usually at a fixed rate — for a set period. Almost every bank and credit union offers at least one CD option.
Although CDs are similar to savings accounts, there are a few key differences. First, the money in the account must stay untouched for a set period. You may have to pay a penalty if you withdraw your money before the established period. Terms and interest rates vary based on the financial institution, so it’s always important to get the details before opening your account so you can get the best interest rate and deposit terms possible. It’s worth noting that there is no monthly fee for a CD, but the initial deposit is the only deposit you can make. If you want to add more money, you’ll need to open a separate CD.
CDs offer varying terms, depending on the product and the financial institution that issues them. The best one for you depends on your financial goals. Some CD terms are as short as 90 days, while others can be up to five years. If you can afford to let your money sit for a while, a longer term may be best because it will have a higher interest rate, meaning you will earn more money over time. If there’s a chance that you will need those funds in the near future, then a shorter term may be better for you. No matter your term length, keeping track of when your CD will mature is essential. Once your CD matures, there is a predetermined window of time during which you can withdraw your money. Otherwise, the bank will automatically renew your CD at a new rate.
Is a CD Right for You?
Are you close to retiring? If so, a CD may be a good option for you. Why? If you currently invest in mutual funds or the stock market, you may have noticed the ups and downs of the market have a direct impact on your earnings. However, your rate is fixed with a CD, so the money you earn is not tied to the market's volatility. It is a less risky retirement savings option for your money. Also, many financial institutions allow you to use your IRA money to fund your CD.
CDs may be a wise choice if you are saving for a large expense, such as a down payment on a home or a big family vacation. Many people prefer CDs over investing the lump sum in other ways because it is safe, the rates are fixed, and they are federally insured up to $250,000 — meaning you get your money back in the unlikely event that your bank or credit union goes under.
CDs can also be an excellent option for those who want to set aside and grow an emergency fund. The point of an emergency fund is that the money shouldn’t be used unless it’s absolutely necessary. CDs add a level of accountability because there is a penalty if you withdraw money before the term ends. As a result, you’ll think twice before pulling out funds. Plus, you’ll grow that fund over time and improve your financial well-being. If you would rather have an account that gives you more access to the money you’ve deposited, a traditional savings account may be a better option — but remember, you’ll probably earn less in interest.
Looking To Invest? Try a CD Ladder!
If you want your money to make money but investing feels too risky, consider a CD ladder. Here’s how it works:
You put money in multiple CDs with varying terms. Each term should be staggered, slightly longer than the next, building to a five-year term. As accounts mature, you reinvest them in CDs with five-year terms. Eventually, you should have multiple CDs with high interest rates, with one of them maturing every year. You can then decide if you want to withdraw that money or reinvest it for another five years.
So, what’s the benefit of a CD ladder? First, it takes some pressure off timing your CDs based on interest rates. With a CD ladder, there’s less risk of committing to a low interest rate right before rates rise or missing out on a high interest rate right before they drop. Second, there’s added flexibility with CD ladders. You get to split your investments and decide how much money to put in each CD within the ladder. Lastly, your money is more accessible within a CD ladder. With CDs maturing yearly, you’ll always have the option of reinvesting or withdrawing your money.
Interested in opening a CD? Spero Financial offers some of the best interest rates on the market. Stop by a branch or contact us today. We’ll help you figure out which option works best for you.