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Let a certificate of deposit act as your savings "lock box"

January 18, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Perhaps the most memorable policy position of Al Gore's 2000 campaign for President was the idea of putting Social Security funding into a "lock box," meaning that funds for paying future Social Security benefits would be segregated from other government finances and couldn't be borrowed against or otherwise used for non-Social Security purposes in the meantime.

Many individuals need to take the "lock box" approach to their personal retirement savings. As you see your bank account start to accumulate money, it's all too easy to find near-term needs for that money. After all, those needs seem so pressing, and your retirement seems so far off.

Bit-by-bit, you dip into those savings for short-term needs, and somehow that money never quite makes it back into your savings account. At this rate, you'll be in for an unpleasant surprise when you reach retirement.

Locking money up in a certificate of deposit, instead of keeping it easily accessible in money market or savings accounts, can be a good way to start to develop long-term savings habits.

Using CDs as a lock box--starting the long-term savings habit

Because a CD requires you to commit your money for a specified term and will generally carry a penalty for early withdrawal, it can act as a form of lock box to help you develop long-term savings habits. Here are some steps to get you started:

  1. Set a target for buying a CD. Save up for a CD the way you would for a television set or down payment on a car--have a specific amount in mind, and a date by which you plan to have that amount built up. This will give your savings an initial goal that will discourage you from diverting your savings for other purposes.
  2. Choose a long-term CD. When you've built up an appropriate amount for a CD--say, $5,000 or more--take the plunge into a long-term CD. Interest rates on CDs tend to get better the longer the term of the CD anyway, and making this commitment should help remove the temptation to spend money you're trying to save.
  3. Shop for the best CD rates. Choosing a long-term CD is one step to getting the best interest rate, but since CD rates vary, make sure you shop around before you make a commitment.
  4. Earmark your CDs for specific purposes. Plan ahead for what you are going to do with the proceeds from each CD as it matures. Keep the focus on your long-term savings goals. Otherwise, a maturing CD can feel too much like a windfall of cash to be spent.

CDs probably won't be appropriate for all of your long-term savings needs. Especially with even the best cd rates as low as they are these days, you'll need more growth-oriented components, such as stocks, added to your portfolio of savings over time. However, when you own stocks and other long-term investments, it is especially important not to liquidate them suddenly for short-term needs.

Starting out by locking money up in a CD can help you develop habits that will allow you to leave other investments alone as well, so they have a chance to grow to fund your retirement.

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