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Closing your savings account could be one of the best things you do to make more money. Savings accounts are popular because the money is there when needed. However, the accounts offer a paltry rate of return compared with other investments. In fact, many savings accounts do not keep pace with inflation. With savvy strategies such as CD ladders, your investments can earn more money, and you remain nearly as liquid as you would be with a savings account.
Certificates of deposit, or CDs, are insured by the government, so there’s no risk in the overwhelming majority of situations. CDs also offer higher rates of return than savings accounts. The longer the term you sign up for with a CD, the higher the interest you typically make. That said, many people prefer to buy multiple CDs for shorter terms rather than purchase one long-term CD for a huge amount. This strategy is known as CD laddering.
With CD ladders, your CDs mature at different dates. For instance, you could buy a three-month CD, a six-month CD, a one-year CD and an 18-month CD. The staggering keeps your money relatively liquid and addresses the potential disadvantage of being locked into a certain rate if interest rates increase. A word of caution: If you withdraw a CD before it matures, penalties such as losing your accumulated interest most likely apply.
This investment strategy may seem odd as a short-term investment, and it does come with some risk. However, it can be really smart and is typically better than a savings account. Roth IRAs are funded with after-tax dollars, meaning you can withdraw your contributions at any time. Of course, while it is ideal to keep the money invested to maximize your return, it’s good to know you have financial liquidity as you save for retirement. There’s no penalty to withdraw funds, and you have access to bonds, mutual funds and other investment opportunities. Your return could be profitable, but there is the risk of losing some money.
Bond funds for the short term set you up for good returns coupled with low risk. Not only that, your money is available without penalty if you need it. The only time in recent history when bond funds went sour was during the 2008-2009 economic collapse. Many investors lost money on their bond funds, but in general, you should expect positive returns. A bond fund is often a good middle ground between a CD and a Roth IRA.