Christmas Day is just inserted in the title because it is referenced later and it nicely abbreviates to CD. This abbreviation also happens to be the same for a Certificate of Deposit, which is really what this post is about.
I imagine most of us have likely been in the position where it is right before Christmas, a family member’s birthday, or a trip and the time to pay for the event is upon us before we have set aside the money needed to pay. With the convenience of the credit card, we charge the necessary amount needed to get through the event. If we are fortunate enough, we pay off the credit card balance before finance charges start to build. If we are like the majority of Americans, we now have more debt hanging over us.
What I would like to propose here is a way to relieve the financial burden of such scenarios, and in the process actually make a small sum of money. In essence this small sum is like paying yourself for exhibiting self-control related to finances and planning.
In this scenario I will be using actual numbers for account minimums and interest rates from my local credit union. Collectively, local credit unions have lower minimums and higher interest rates. Credit union vs. Bank is a whole different post someday…
Here we go! For the sake of minimums I will be using our credit union’s CD minimum of $500. This $500 would be money used for purchasing gifts for the Christmas holiday. (By the end of this post my hope is you can insert any life event using the same concept).
CDs are similar to savings accounts in that they are insured “money in the bank” and thus virtually risk free. The funds are insured, and, assuming there are no early withdrawal penalties, the investment is considered to be as safe as cash in a savings or checking account. -Investopedia
Our bank is currently offering a 9-month CD special of 2.25% APR (Annual Percentage Rate). My credit card carries an 13% interest rate for any statement balance I do not pay off in time. Stay with me, I know it might sound like jargon and math!
If I opened a $500 9-month CD today, on December 15 my account would be credited with $508.41. A net gain of $8.41. Now I completely understand this does not sound like much, especially given there is an early withdrawal penalty if you end up needing the money back quickly.
$8.41 sounds much better when looking at the credit card alternative. If I put $500 on a credit card at Christmas and then pay it off in the same 9-month period of time, I will pay at least $50 in interest. This makes the net gain almost $60 for planning ahead and putting money in the CD.
The biggest benefit is not financial. If you have experienced the frustration/sadness of racking up credit card debt during what should be a time of celebration, this plan will ease that pain! Going back to the scenario of opening a CD today, the CD will mature right before the holiday. Anything you have charged leading up to the event can be paid off with the money you have already set aside. Add to this that modest interest bump helping out as well.
This scenario assumes a $500 CD due to the minimum our credit union has set for opening a CD. If you have an event in the future that will be $2,000 or more, you can multiply the interest out and save even more. We have done this for a trip in the past and made $50 in interest. Again, on its own $50 was not much, but it is some. More importantly, the $50 was in addition to not having to borrow with a credit card.
I imagine as some read this they may think, “Well it must be nice to have $500 or $2,000 to put aside, there is no way I can put that much away!” If this is you I would ask this question. If you are not able to put aside $500 now, are you reallyable to put $500 on a credit card? The credit card is a crutch. At times a necessary one. A credit card is not a device that should be used for planned borrowing.
If you have the self-control to pay off a credit card, you have the self-control to open a CD for planned events. If you do not currently have the personal, financial, or emotional ability to pay off a credit card balance, that is a topic for another time.
I hope this is in some way helpful, and I challenge you to pick a future event you know you will need to save for and open a CD. CDs come in varying lengths and at varying interest rates. For this post, a 9-month CD makes sense as we prepare for Christmas in December. For next spring break, we could open a 12-month CD and have at least part of a trip paid for. Many credit unions or banks will even offer CDs up to 60-months in duration. That is five years out for planning!
Whether you are able to plan 3-months or 60-months out, the feeling of setting “untouchable” money aside and then having it flood back into your account is a great feeling. Last month we had a CD mature we had not been counting as part of our family budget and it felt like hitting the lottery. In fact, I have never won more than $50 in the lottery so with respect to money, I guess this felt much better!
If anyone takes on this challenge, I would love to hear how it works out for you. No financial details needed, but it would be great to read if someone else has found this ‘interest’ing trick useful. Peace.