3 Ways A Certificate Of Deposit (CD) Can Help Tame Your Finances

Do you want to take control of your finances? Many Americans are looking for ways to do this, and they often end up with complex methods, technology-driven tools, or starvation budgets to accomplish it. But you can get a lot of mileage out of a much simpler financial tool: the certificate of deposit.

A certificate of deposit (CD) is a bank savings product that allows you to put away a sum of money ranging from as little as $100 to over $10,000 and earn interest in return. The CD is issued for a fixed period of time, at the end of which the owner may take the money or reinvest it for another period.

So, how can this uncomplicated financial product help you manage your finances? Here are three key ways.

1. It Ties Up Your Money. If you, like many people, have an overspending problem, one way to prevent it is to make some of your money less accessible. With a CD, you can access the money in an emergency, but you pay a penalty for doing so. This penalty is generally equal to the interest you would have received. This combination of accessibility and modest penalties discourages non-emergency withdrawals while still leaving a safety net.

2. You Earn More Interest. Interest rates on federally insured investment methods through your bank or credit union are often negligible. A CD offers rates that are many times higher for the same amount of investment. Often, the longer you can put the money aside, the higher rate you'll earn in return. When each CD matures, roll the extra money added through interest into a new CD. Shortly, you'll see the value of compound interest. 

3. You Can Time Withdrawals. One way to use a CD to earn interest while still using those funds is to time the withdrawals well. If you owe annual insurance payments in June, for instance, you could put aside money in a six month CD in January. By June, when your bill is due, you will have the funds ready and you'll have earned interest on them in the meantime. Because CDs come in many terms, you can tailor a collection of certificates to your particular bills.

Which of these budgeting tools can help you the most? No matter whether you need to build a nest egg faster or control your spending through outside means, a certificate of deposit could be just what the doctor ordered. Talk to your bank or credit union today to learn more.

For more information on the interest rates of certificates of deposit and other investments, consult a financial resource in your area.