Beating Broke

Personal Finance from the Broke Perspective

Beating Broke Rules: Certificate of Deposit

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What is a Certificate of Deposit?  Certificate of Deposit (commonly called CDs) are basically a savings account that pays a set rate over a set term.  The rate tends to be higher than a normal savings account rate because the money is locked into the CD for a set term. If you choose to withdraw your money before the term ends, you pay a penalty.  The penalty is usually a preset number of months interest on the CD. At the end of the term, you can renew for another term at another set rate or keep your money.

Rules: Certificate of Deposit
Safe and Stable Investments

CDs are a very stable investment. They are also a very liquid investment. As such, they make for rather poor returns on the long term and they carry a penalty for withdrawal before the “maturity”.  However, there are several uses that can make them a valuable part of your financial portfolio.

6 and 12 month CDs can be a great place to keep your emergency fund.  Chances are you won’t need the money, so you might as well invest it.  The key here is that the CD is a safe, stable, and easily accessible form of investment.  You’ll still get the higher interest rates that you would expect from a high-yield savings and, depending on the term length, sometimes better.

As you get older, CDs can play an important role in your retirement accounts as a small percentage of your portfolio.  Again, the stability and reliability of the nature of CDs makes is the key.  As you age, a growing portion of your retirement portfolio should be in stable cash investments.  Many will recommend something like a money market account or a high yield savings, but CDs are in that same group.  And with a retirement account, you can usually tie the money up a little longer and get better returns.  Look for something in the 2-5 year range for maturity.

As I mentioned before, one of the major drawbacks to CDs is the early withdrawal penalty.  In most cases (consult your CD paperwork) the penalty is 3 months interest.  So, if you were to withdrawal the money after only three months, you would only be able to withdrawal the original amount.  If you withdrawal the money at only one month, you would get less than the original amount.  Anytime after 3 months and you get the original amount plus any interest above the three months penalty.

While the penalty can be bad if you need the money early in the term, if you need the money for an emergency, it can be overlooked pretty easily.

Beating Broke Rule: CDs can be an important part of your investment portfolio

Beating Broke Rules: Bonuses

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Beating Broke Rule: Spend your Bonuses wisely.

Every year, many of us are lucky enough to receive some sort of bonus from our employer.  (If you’re self employed, that’s bonus enough. 😉 )  And when we do, the inevitable question arises.  What do I do with the money?  And then, how to budget for it?

The simple answer is to spend it wisely.  In a more complex answer, it depends on what your goals are for your financial life.  Using your bonus to buy Christmas presents may make you feel good for a month or two, but will you feel guilty afterward?  You’ll feel much better, in the long run, if you spend the money wisely towards your goals.

198/365 - paydayHere’s the downside to that, though.  You’ll also feel guilty if you use it all for debt repayment.  Each of you will have a different situation, but here’s how we usually use our bonus here in Beating Broke.

Consider taking 10% of the bonus and blowing it.  Buy some presents.  Take your family out to dinner and a movie.  Whatever you want.  Give yourself 10% in cash and free rein to do whatever you want with it. You’ll feel better when you do.

With the remaining, take a look at your situation.  Do you have a purchase that you’ve been saving up for, or putting off until you could afford it?  I’m not talking about those gifts, or the television upgrade, but things that you really need.  Maybe some costco eyeglasses? For example, a portion of my bonus (if I get it) will go towards buying new tires for one of our cars and paying for a repair that one of them needs.  It won’t take the whole bonus, but a good portion of it.  And it will be extremely relieving to not have to come up with that money out of my normal paycheck.  If the bonus doesn’t come, I’ll still have to pay for those things, but it might take a little longer to pay for them.

Maybe your situation doesn’t have a purchase like that that you need to pay for.  But, maybe you’ve got some debt that it could help retire.  What we don’t spend on tires and repairs, will likely go towards paying off a debt.  It won’t pay off any of them all by itself, but it will cut the payoff by several months.  And, while that doesn’t give me the same feeling that just blowing the money on stuff does, it will leave me feeling much better for a far longer time.

The bottom line is this.  Think about how you spend your bonus and spend it wisely.  You’ll feel much better for it.

photo credit: jypsygen

Beating Broke Rules: Dedication

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You can’t turn a corner, enter a bookstore, listen to radio, read a blog, or watch sports without hearing the word dedication several times.  We all talk about dedication in one shape or another.  And in truth, many of us still lack it.

Beating Broke Rule: Get Dedicated

Get dedicated to your goals.  Get dedicated to your new life being free from debt.  Get dedicated to saving for your retirement.  Get dedicated to saving for a house.  A new car.  A ring.  Just get dedicated.

Dedication to your goals is the only thing that will ensure that you can fulfill them.  If you aren’t dedicated to them, you won’t follow through.  If you aren’t dedicated, you won’t meet your goals.  Without dedication, you will fail.

Make the choice today.  Dedicate yourself to your goals and work every day to fulfill them.  Take a step now to reach your goals.  You’ll reach them before you know it.