Unexpected windfall? Put it in a CD.
Locking your money away in a CD provides you a period of 鈥渃ooldown鈥� where you can think rationally about what to do with the money instead of making a spur-of-the-moment (and likely poor) decision about how to it.
Locking your money away in a CD provides you a period of 鈥渃ooldown鈥� where you can think rationally about what to do with the money instead of making a spur-of-the-moment (and likely poor) decision about how to it.
When I wrote "365 Ways to Live Cheap" in 2007, a person could easily find a bank CD that offered a 6% return. All you had to do was lock up your money at the bank for a year or so and they鈥檇 give you back six cents on every dollar.
That鈥檚 a pretty good deal. In fact, if it were available today, I would have a lot of my money in such CDs.
Unfortunately, since 2007, rates on CDs and savings accounts have dropped through the floor. Today, you鈥檙e hard-pressed to find a CD that will return 2%, let alone 6%.
Still, the value of a CD isn鈥檛 why I put this advice in the book to begin with. The point of this entry is something else entirely.
We all have windfalls. A relative suddenly dies and leaves us some money. We win a big drawing or contest. We have an opportunity for some side work that puts some one-time cash in our pocket.
When we have a windfall, there鈥檚 a temptation to splurge. A big temptation.
The last time I had a nice unexpected windfall, I was really tempted to go buy several smaller items that I had wanted for a while but hadn鈥檛 bought because, honestly, I didn鈥檛 really need them. I had my eye on a new board game, a pair of shoes, and a couple items for our kitchen.
Willpower kept me from doing it. I put the money in our checking account quietly and went on with life.
However, I know that I wouldn鈥檛 have had that kind of willpower a few years ago. I I would have had have those new items in our house faster than you can blink.
That鈥檚 the reason I suggested putting the money in a CD. If you put money in a CD, it鈥檚 essentially locked away for a while. You can鈥檛 withdraw it without losing some of that money. This provides you a period of 鈥渃ooldown鈥� where you can think rationally about what to do with the money instead of making a spur-of-the-moment (and likely poor) decision about how to use the money.
A CD, in other words, is something of a lockbox that, at the time of the writing of the book, paid a pretty good interest rate.
Now that CDs aren鈥檛 paying as good of an interest rate, is the advice still valid? I think it is, but it鈥檚 not as strong as it once was. A CD will still pay you a better return than a savings account. It will still keep your money locked away until you鈥檙e ready to make the right decision with it. It鈥檚 also convenient, because you can handle all of this at the bank you already do business with.
If you鈥檙e really worried about return on the money, there are other investment options, of course. You could open a brokerage account and put it into stocks, for example. However, stocks have risk (meaning you might lose money), you have another entity to do business with, and they鈥檙e still liquid (meaning you can essentially pull out the money without penalty whenever you want).
If you鈥檙e still struggling with willpower when you find yourself with a windfall, a CD is still a pretty good place to put it.
This post is part of a yearlong series called 鈥�365 Ways to Live Cheap (Revisited),鈥� in which I鈥檓 revisiting the entries from my book 鈥�365 Ways to Live Cheap,鈥� which is available at Amazon and at bookstores everywhere.聽