Baby Steps: Step 2

Last time we looked at something really simple like making sure your savings account is getting a good interest rate. As interest rates start to possibly stabilize, it might be time to start looking at a second simple option....CDs. Some things to remember about CDs is that they offer a higher rate than a savings account but do have a penalty in interest lost for early withdrawal and the rate will not change should interest rates rise or fall. These can be ideal as an initial way of saving up money (typically in amounts of $500 and up). It could also be an ideal way to invest money for a larger purchase you want to make in a few months to a few years. You can also consider using a scheme known as CD laddering to get a higher rate than your savings account, while still keeping everything FDIC insured. For CD laddering schemes, it seems like a 1-year CD with a CD maturing every 1 to 2 months is a decent option. I suggest the 1-year because I find the interest rate improvement beyond a 1 year commitment to be too small unless you are banking on interest rates going down. Having frequent maturities helps to counter interest rate changes instead of rolling the dice 1x a year and hoping for a good rate. It also helps you have money available to pull out from CDs should you need it without having to take the penalty for early withdrawal. Now, just like savings accounts, you want to search for the best interest rate (I typically like Everbank). For this I use the CD rate search tool at CNN Money: http://money.cnn.com/pf/rates/

Of course if the best rates are close to the CD rates currently offered by the bank you have your savings account with, it might be worth sticking with them for simplicity sake.

Tags:

• Baby_Steps