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4 steps to building CD rates

November 08, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Because it is such a long process, saving for retirement is often likened to a marathon--and perhaps that's what scares people. After all, most people aren't ready to go out and run a marathon. However, to extend the analogy, saving for retirement is also like a marathon in that you have to start with realistic, shorter goals, and build yourself up to the larger task over time.

CDs can be an ideal vehicle to help with this type of savings training. By progressing from shorter to longer-term CDs, you can not only acclimate yourself to longer savings periods, but also build your CD rates up in the process since longer CDs typically pay higher interest rates than shorter ones.

Here are four steps to building up both your savings and CD rates at a measured pace:

  1. The short jog. Just as you might start a running program with a short jog, a short-term CD can be a good vehicle for starting a savings program. Using CDs, which lock up your money for a specified period, can help you gain the discipline of not dipping into your savings too impulsively. Still, choosing relatively short maturities at first will help you avoid feeling completely cut off from your money. You can get CDs that last as little as one month or three months, but those CD rates aren't typically any better than money market or savings account rates. Try starting with something in the six-month to one-year range. You'll find interest rates on CDs start to be a little higher at those levels.
  2. Stretching your endurance. If you've found you can hold a six-month or one-year CD to maturity without having to break into it, now you can try stretching the length out incrementally, like a runner gradually building endurance. Perhaps lengthen out your CDs by six or 12 months each time they roll over. You'll find that not only are you getting more committed to savings, but that your CD rates are gradually getting higher.
  3. Middle distances. Like a runner competing in a five- or 10-kilometer race before moving up to a marathon, you can start committing money to CDs for middle distances of time, such as three-to-five years. This can be useful for intermediate savings goals, such as a new car, a downpayment on a house, or college expenses.
  4. The marathon. The marathon of savings is your long-term retirement plan. While this will typically involve investments such as stocks and bonds, there can still be a place for CDs. For example, intermediate-to-long-term CDs can be a viable place to put emergency savings. The reason is that while there may be a penalty for early withdrawal, chances are you'll be able to roll a CD over a few times before a real emergency comes up. By then, the extra CD rates you've been earning should more than compensate for an early withdrawal penalty, especially if you shop for CDs with relatively low penalties.

It's tough to envision going from not running at all to completing a marathon. In the same way, it's difficult for people to start saving by focusing on something as far off as retirement. But in either case, an interim step can provide a more achievable goal, while also getting you ready to take the next step.


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