I like free money in just about any shape or form. And if you ask me, interest is one of the best types of free money you can get. You're not doing anything to earn it -- you're simply sticking money in a bank account and getting paid to have it sit there.
Now, you could keep your money in a regular savings account. And these days, you may be looking at about 4% interest. But with many CDs paying above 5%, you may be inclined to chase an even higher interest rate on your money.
Plus, the upside of choosing CDs is that your interest rate is guaranteed. With a savings account, your rate could drop without notice, leaving you with less money.
Unfortunately, though, when you open a CD, you have to commit to keeping your money where it is for your CD's duration. Withdraw your cash early, and you're generally looking at a penalty. But there may be a way to avoid an early withdrawal penalty on your next CD. In fact, here are three potential solutions for getting out of paying one.
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1. Ladder your CDs
Laddering CDs means opening various CDs with different maturity dates instead of putting all of your money into a single CD. The benefit is that you have money coming due at various points during the year, making it less likely that you'll have to cash out a CD early and take a penalty.
Let's say you take $4,000 and instead of opening a single 12-month CD, you open four $1,000 CDs coming due every three months (in other words, a 3-month CD, 6-month CD, and so forth). If you then find yourself up against an $800 car repair you emergency fund can't cover, but you have your 3-month CD coming due in a week or two, you may be able to get your car fixed, charge the expense on your credit card, and pay it off before you lose money to interest.
On the other hand, if you take your entire $4,000 and put it into a 12-month CD, in this example, you may have to withdraw it early because you can't wait months to fix a car, and you shouldn't wait months to pay a credit card bill because of all the interest you'll rack up. So here, laddering could be your ticket to avoiding an early withdrawal penalty.
2. Open a no-penalty CD
A no-penalty CD works just the way you'd imagine it does. You open a CD with a specific interest rate and term, but there's no penalty for an early withdrawal.
A no-penalty CD might seem like a great solution, but there's a big drawback -- you probably won't earn as much interest with one of these CDs as a CD where there could be a penalty involved. You'll need to weigh that flexibility against a lower interest rate on your money.
3. Maintain a long-standing relationship with your bank
Sometimes, when you're a customer in good standing and your bank account balance dips below the minimum needed to avoid a maintenance fee, you can get that fee waived if it's a one-off thing. Similarly, if you're a long-standing customer of a given bank and you're forced to cash out a CD early, you may be able to use your relationship to get that fee removed.
Typically, you'll have to call and ask for that courtesy. But your bank may be willing to let you off the hook if you're been a customer for 10 years and have accounts other than your CD. Your bank may also be willing to work with you if you're able to show proof of needing that money -- such as documentation that you've been laid off.
Penalties are probably the worst part of opening a CD. If you hate the idea of paying one, use these strategies to avoid one. That way, you can continue to enjoy the free money your bank is paying you.
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