If youâve got savings goals on your mind, then you know they come in all sizes and time horizons.
As you consider all of your options for hitting those goalsâfrom savings accounts to stocks and bonds to stuffing your cash under the mattressâcertificates of deposit stand out among the pack thanks to their competitive rates and safety.
âThe reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account,â says Kimberly Palmer, personal finance expert at NerdWallet.
Steady returns, in fact, are among the top benefits of CDs. Plus, Palmer adds that CDs are usually FDIC-insured, typically up to $250,000 for each depositor (or the maximum allowed by law).
With all those benefits in mind, you might still be wondering if a CD is the right fit for your savings strategy. So, what is a certificate of deposit and how does it work?
What is a certificate of deposit?
A certificate of deposit provides a guaranteed rate of return (the interest rate) on your money as long as you agree not to withdraw the funds you deposited (the principal) until after a specified amount of time (the term).
âItâs best for someone who doesnât need their money immediately,â Palmer says. âIn exchange for that longer period of time where your money is inaccessible, you earn a higher return.â
How does a certificate of deposit work?
Before you can start using certificates of deposit to keep your savings growing at a fixed rate, it helps to know how CDs work. Itâs time to familiarize yourself with this one-of-a-kind savings product.
âThe reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account.â
CD minimum deposit
While you can find savings accounts with no minimum deposit requirement, most banks require a minimum deposit to open a certificate of deposit. As you learn how certificates of deposit work, note that minimum deposits can vary depending on the financial institution, but at Discover itâs $2,500.
Once you open a CD, your money grows until it matures at the end of its term. Discover CD terms start at three months, and the longest term available is 10 years.
In addition to getting a higher rate than you can on many savings accounts, CD rates are fixed, which means thereâs no risk of the rate going down during the term. (Keep in mind they canât go up, either.) Generally, the longer the CD term, the higher the interest rate you can lock in for your money.
CD early withdrawal penalty
Understanding CD early withdrawal penalties is key to answering the âHow does a certificate of deposit work?â question.
You can typically find competitive rates for CDs because your financial institution is counting on having that money for the full term. For that reason, if you pull out any money in your CD before the term ends, you could be hit with a penalty.
The early withdrawal penalty often depends on the length of the CDâs term, and itâs a good idea to check with your bank to understand its specific withdrawal penalties.
Got the gist of what a certificate of deposit is? Now itâs time to put this account to work toward your unique savings goals.
How can you use CDs in your own savings strategy?
Because CDs are offered across a wide range of terms, you have the opportunity to get creative with how you take advantage of them. Whether your savings goals are big or small, long- or short-term, thereâs a CD savings strategy that will work for you.
Using CDs for short-term goals (less than three years)
âCDs are good for short-term or near-term liquidity needs,â says Philip Gibson, an associate professor of finance.
Letâs say you want to have money ready to spend on an engagement ring a year from now. Putting that money into the stock market could be risky, because if there were a market dip, youâd be out of luckâand you wouldnât be the only one disappointed!
Instead, Gibson says, you can put that money into a 12-month CD and ensure that it will be there a year from now.
How does a certificate of deposit work out to be a better short-term option than cash, you ask? Money within a CD will have grown thanks to the competitive interest rate. Cash, Gibson points out, typically loses value over time due to inflation.
However, CDs arenât ideal for storing cash that you might need at a momentâs notice. Remember: If you pull out your money from a CD before the end of its term, you could be on the hook for an early withdrawal penalty. If quick access is a priority, youâd be better off using a checking account or savings account.
Using CDs for medium-term goals (3-5 years)
CDs can be an effective way to save for medium-term goals, but you need to choose your CD term wisely.
A simple way to reach your goals.
Watch your savings grow with aÂ CD.
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âYou want to make sure the CD term you choose matches the time horizon of your goal,â Palmer says.
For example, if youâll need that money for a down payment on a home in three years, it would make sense to put your money into a CD with a three-year term. A three-year CD would likely give you a higher return than a one- or two-year CD, and your money will be accessible when you are ready to buy a house.
Palmer adds that because money in CDs is only accessible after they mature at the end of their terms, youâll want to make sure you have three to six months of emergency savings available for unexpected short-term needs before opening a CD with a three- to five-year term.
Using CDs for longer-term goals and retirement
The longer your time horizon for your goals, the more time you have to take advantage of the power of compounding in a CD. Plus, given how certificates of deposit work, longer terms usually have higher interest rates.
If youâre looking even further ahead to retirement, you can open an IRA CD. IRA CDs give you the same reliable growth of regular CDs with the tax advantages of IRAs.
Using a CD ladder to support multiple goals
While the above examples show how CDs work to save for specific financial goals, there is a way to use CDs to continually grow your savings as you reach multiple savings goals with varying time horizons. At the same time, with this strategy you can:
Keep your funds liquid.
Take advantage of interest rates if they go up.
Lock in the higher CD rates associated with longer terms.
Itâs called a CD ladder, and Palmer says this CD strategy is growing in popularity among savvy savers.
With a CD ladder, you donât try to guess exactly when youâll need your funds to be available. Instead, you open multiple CDs with varying maturity dates.
âYou might have one CD that matures in six months, one that matures in a year and then another in 18 months,â Palmer says. âThat means that the terms keep coming due, and you continually have access to your money.â
Every time a new CD matures, you have the option of putting that money toward something you have been saving for, such as a house.
If you arenât ready to use that money when a CD matures, then you simply open a new CD with a longer term than any CDs you currently have. That new CD is added to the âladder,â and your money grows at longer-term rates as older CDs approach maturity.
Once you get into a groove with a CD ladder, you can enjoy all the benefits of CDs without worrying about finding a single CD that perfectly matches up with your financial goals.
Ready to get started with a CD?
Now that you have a handle on what a certificate of deposit is and how CDs can work for you, itâs time to get your savings plan started.
Learn how a Discover Certificate of Deposit can help you reach your savings goals, with flexible terms from three months to 10 years.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
The post This is How CDs Workâand How You Can Use Them to Grow Your Savings appeared first on Discover Bank – Banking Topics Blog.
What if you could pay for your next date night or trip to the grocery storeâwithout having to dip into your budget? If you use cash back to your advantage, these benefits could become a reality.
In the past, you had to swipe a credit card to earn cash back. But with Discover Cashback Debit, you can earn cash back by spending with your debit card (you read that right: debit card), allowing you to reach your financial goals without the risk of going into debt.
To best use this budget bonus, you might be wondering, âWhat should I do with my debit card cash back?” According to Eric Rosenberg, financial consultant and founder of the website Personal Profitability, âYou could put [your cash back] into savings or treat yourself to something from your wish list.”
Read on for things to do with cash back to help you achieve the right balance of responsibility and fun:
1. Save for a rainy day
Sometimes it seems like everything goes wrong all at once: You get a flat tire. The sink starts leaking (ugh, again!). You get a parking ticket. Since life can throw unexpected, costly curveballs your way, it’s important to have an emergency fund. Also known as a rainy day fund, an emergency fund is cash that’s set aside to cover unplanned, yet crucial, expenses.
âSo many people can’t afford the cost of an emergency from their savings,” Rosenberg says. If you don’t have this type of fund to fall back on, starting an emergency fund (or adding to an existing fund) could be a top priority when evaluating what to do with your cash back from a debit card.
When thinking about building an emergency fund as a thing to do with cash back, note that experts typically recommend putting aside at least three to six months of living expenses for this purpose. To maximize your emergency fund, you may want to consider moving these savings (and the cash back you’re putting toward this fund) to a high-yield savings account. That way, your emergency fund can steadily grow with interest until you need it. (P.S. More to come on how to automatically move your cash back into savings.)
2. Pay down your debt
If you owe, it can be tough to climb your way out of debt. Whether it’s from credit cards, student loans or a mortgage, interest is accruing and costing you money. Learning how to use your debit card cash back to offset debt can help you save on those interest payments down the road.
According to consumer money-saving expert Andrea Woroch, when you’re focusing on paying off debt, “It’s natural to cut back where you can. But you may eventually hit a wall where you can’t find ways to tackle expenses any further,” she says. That’s where learning how to use debit card cash back comes into play. Since a debit card with a cash back feature can allow you to earn for your everyday spending, those earnings can become a new source for paying down debt, Woroch adds.
3. Shore up for those special moments
You know you’d like to have more nights out, but they don’t come cheap. What to do with your cash back could include spending on special outings, Woroch says. Is there a restaurant you and your significant other have been dying to try? Is there a concert the whole family is super eager to see? There may also be larger events with family and friends to think aboutâplanning a milestone birthday or anniversary or that getaway with college buds. You can set aside your debit card cash back and earmark it for your relationships to create memories that will last a lifetime.
âYou could put [your cash back] into savings or treat yourself to something from your wish list.”
4. Support your children’s allowance
If you have kids, you’ve probably heard this one before: âMom, Dad, can I have some money?” Sometimes it can feel like you’re a walking ATM. One thing to do with cash back is to set aside an allowance for your kids. You can then use this cash to teach your children good savings habits and how to manage money on a monthly basis for the things they need and want, says Rosenberg of Personal Profitability. The best part: The money isn’t really coming out of your budget since you’re earning it for your everyday expenses and from money you’d be spending anyways. Win-win.
In thinking about what to do with your cash back, spending it on gift-giving and holiday expenses may be a good goal. “Some people go into debt during the holidays. To help avoid that circumstance, use your cash back to get ahead,” Woroch says.
And, really do think ahead if holiday spending is on your list of things to do with your cash back. The earlier you stash your cash back away for the holidays, the longer it will have time to accrue if you put it in a savings account for safekeeping. Season’s greetings may be the last thing on your mind while you’re flipping burgers on the 4th, but planning ahead could really impact your end-of-year festive spending.
How to maximize your cash back
Now that you know what to do with your cash backâwhether it’s going to work for your emergency fund or funding emergency holiday giftsâconsider steps you can take to get the most out of your extra dough. For example, find a rewards program that matches your spending style. With Discover Cashback Debit, you can earn 1% cash back on up to $3,000 in debit card purchases each month.1 That’s up to $360 a year. Not too bad for just going about your daily debit card spending.
Get 1% cashback on Debit from Discover. 1% cashback on up to $3000 in debit card purchases every month. Limitations apply. Excludes Money market accounts.Discover Bank,Member FDIC.Learn More
To make the process of saving that extra cash even easier, consider opening a Discover Online Savings Account. If you sign up for Auto Redemption to Savings, your cash back will be automatically deposited into your savings account every month.
âThe hardest part about saving for many people is remembering to make a transfer or take the cash to the bank,” Rosenberg says. “If you can automate it, you are setting yourself up for success. It’s like saving while you sleep.”
If you’re still considering how to use your debit card cash back to the fullest, Woroch suggests paying for group purchases when you’re out with family or friends. “Whether you’re going to dinner or renting a condo, cover the entire expense on your card and ask friends and family to pay you back with cash or [via mobile payment],” Woroch says. “This way you can benefit from earning more rewards.”
When it comes to how to use your debit card cash back, the key is to make sure you have enough in your account and aren’t spending too much if you offer to temporarily foot the bill. You don’t want to overextend in order to earn, as you could be hit with overdraft fees or not have enough in your account to cover bill payments, Woroch says.
“Whether you’re going to dinner or renting a condo, cover the entire expense on your card and ask friends and family to pay you back with cash or [via mobile payment]. This way you can benefit from earning more rewards.”
Get ahead with a combination of strategies
If you’re looking for things to do with cash back, using these tactics can help you improve your financial foundation and have some fun along the way. Understand your needs and goals to help you create a cash back plan, and then maximize your strategy with tools to help you automatically direct your cash back to savings to limit the temptation to spend the money elsewhere.
“We are all so busy these days, and managing money is often pushed down on the to-do list,” Woroch says. Learning how to use your debit card cash back can help you put money management front and center. Start earning!
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as VenmoÂ® and PayPal, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
The post How to Use Your Debit Card Cash Back to the Fullest appeared first on Discover Bank – Banking Topics Blog.
When personal finance blogger Allan Liwanag was establishing his career and living paycheck to paycheck, he often had just enough money to cover his expenses each month. He ran into an issue with an old checking account that caused him some major grief.
“I forgot to account for the $15 monthly fee that the bank would charge,” Liwanag says. “So I was short covering my rent. It was a stressful situation because I didn’t know at first if the bank would process the payment for the rent or not.” The bank ultimately covered it, but Liwanag got charged $35 for an insufficient funds feeâon top of the original monthly fee.
Liwanag, who now runs a consumer money-saving site called The Practical Saver, learned a lot from that experience. The main point being, checking accounts can rack up feesâeven for standard activity. In fact, bank fees, including those for ATM usage and overdrafts, continue to rise year-over-year, according to a 2019 Bankrate survey. As Liwanag learned, fees could eat away at the funds in your checking account, which may become problematic when it’s time to pay bills or take care of other expenses.
What you may not know is that there are no-fee checking account options without the hassle of common fees. DiscoverÂ®Cashback Debit, a no-fee checking account, for instance, doesn’t charge any account fees.1 It also offers no-fee checking without an opening deposit requirement, which is especially beneficial if you’re starting with a small balance or plan to make big withdrawals or transfers.
So you might be thinking right about now, “What are the benefits of a no-fee checking account?” To answer that question, it’s important to understand what types of fees you may be racking up and how you can make the most of a no-fee account. Let’s get to it.
Bank fees, including those for ATM usage and overdrafts, continue to rise year-over-year.
Your most common checking account fees
Checking account fees can become a trap you may not realize you’ve fallen into until it’s too late. It’s possible to be charged fees just for keeping your account open or for services or features you may have assumed came standard with the account. Being charged a fee doesn’t necessarily mean you’ve done anything wrong, but it’s a hassle you can avoid with the proper research.
Here is a list of some of the common checking account fees you could be paying:
Monthly fees to maintain or service your account
Overdraft or insufficient funds fees
Fees to order books of checks
Online bill pay fees
Stop payment fees
Replacement debit card fees
Not sure which checking account fees you’re dishing out for? Contact your bank or visit its website to get a copy of your deposit account agreement. This document usually has a list of fees related to your checking account that may apply to you.
Another good tipoff: “If you see monthly, quarterly or annual fees broken out on your monthly bank statement, you’ll know whether your account is truly no-fee,” says CPA and financial analyst Riley Adams of Young and the Invested, a site with strategies for financial independence.
It’s important to review your statements regularly to identify which fees you are being charged and to determine how that’s impacting your budget.
3 benefits of a no-fee checking account
Now that you’ve identified the many possible checking account fees you could be charged, you’ll find that the benefits of a no-fee checking account go beyond just freeing up some cash in your budget. In addition to the features you’re used to with a regular checking account, a no-fee checking account gives you a financial edge in the following ways:
More money for your financial goals. “Having a no-fee checking account can help you get ahead financially,” Adams says. “Instead of paying monthly service fees and even overdraft fees, you can apply that money toward your own financial goals.” The money you save on fees could be used to pay down debt, boost a savings account or help fund an education, business venture or vacation.
Flexibility. A benefit of a no-fee checking account is that it allows you to bank on your terms. If you’re just starting out, a no-fee checking account without an opening deposit requirement means you have the flexibility to fund the account with whatever amount makes sense for you. Need to make a big transfer from checking to savings? No problem, since you won’t have to worry about dipping below a minimum balance threshold. You can even go on your merry way using ATMs in your bank’s network without being restricted by fees, and if you accidentally overdraw, your no-fee account’s flexibility may save you the stress of a ding for insufficient funds.
No surprises. “Should I get a no-fee checking account?” was an easy decision for Liwanag because he knows exactly what to expect with one. “A plus of no-fee accounts is that you can rest assured that unaccounted-for or surprise fees will not kick you into overdraft,” Liwanag says. (Or, in other words, less s-t-r-e-s-s.)
Manage your finances with multiple no-fee accounts
There are also ways that no-fee checking accounts can help you better manage your income and expenses, in case you’re still wondering, “Should I get a no-fee checking account?”
Liwanag had no problem answering that question: âI have four,” he says, “which I use for easily tracking specific budget categories or expenses.”
As he explains, it can be easier to track expenses when money for different priorities, such as his emergency fund or that much-needed vacation, is bucketed into different no-fee checking accounts. Because he may be charged fees for excessive withdrawals from a savings account, Liwanag uses his no-fee checking accounts to manage the money he’ll need to access frequently for specific purposes.
The best part: Maintaining multiple checking accounts doesn’t cost him extra since a benefit of no-fee checking accounts means fees aren’t in the equation, he says. Some banks do have limits on how many checking accounts you can open, so be sure to consider this if you’re using a multiple account strategy like Liwanag.
Keeping your expenses organized is a pretty big motivator; so if you’ve answered “yes” to the question, “Should I get a no-fee checking account?”, the next step is knowing how to choose one.
Find the best no-fee checking account for your needs
Although the benefits of a no-fee checking account are key, don’t lose your head too much and forget to consider other checking account features that match your lifestyle. If customer service is your deal breaker, make sure the bank offers it around the clock and that it’s recognized for being top-notch. If you’re always on the go and your phone is right there with you, mobile features and mobile check deposit may be on the top of your list. If you’re regularly withdrawing cash, evaluate the bank’s network of no-fee ATMs and see if an ATM locator is offered to make tracking them down a breeze.
Why should credit cards have all the fun?
Now you can earn cash back with your debit card.
Discover Bank, Member FDIC
If the benefits of a no-fee checking account are top of mind, you may also want to consider the perks of a rewards checking account. For example, Discover’s Cashback Debit even offers 1% cash back on up to $3,000 in debit card purchases each month.2 So on top of a no-fees savings strategy to meet your goals, you could also earn up to $360 a year. (Vacation, here we come!)
Start on your path to smart checking
Clearly, the benefits of a no-fee checking account and a no-fee checking account without an opening deposit requirement are numerous. Just be sure to do your research, then compare your findings carefully. The no-fee checking account you choose should ultimately help you reach your personal financial goals. You may find that saving on fees and reducing financial stress could be just the edge you need to set your checking account on the best course.
1Outgoing wire transfers are subject to a service charge. You may be charged a fee by a non-Discover ATM if it is not part of the 60,000+ ATMs in our no-fee network.
2ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as VenmoÂ® and PayPalÂ®, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries. Venmo and PayPal are registered trademarks of PayPal, Inc.
The post Should I Get a No-Fee Checking Account? appeared first on Discover Bank – Banking Topics Blog.