It's fair to say that 2023 was an interesting year from a banking standpoint. Not only were savings accounts paying generously, but rates on certificates of deposit (CDs) soared at several points during the year following the Federal Reserve's numerous interest rate hikes.
There were a few banking moves I made last year that I'm pretty proud of. Here are three in particular I'm glad I made.
1. I built a CD ladder when rates were up
During the first half of 2023, I realized that CD rates were looking very attractive thanks to the Fed's string of interest rate hikes. I decided to take advantage by putting money into CDs. But instead of opening a single CD, I opted for a laddered approach.
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What I did initially was put some money into a 12-month CD. Then, a couple of months later, I opened another 12-month CD, and then did the same a couple of months after that.
I wanted my money in 12-month CDs because my bank had a better rate for that term than any other at the time. But I also made a point to stagger my CDs so portions of my cash would free up at different intervals, thereby reducing my chances of having to cash out a CD early and incur a penalty.
2. I opened a 12-month CD at the end of the year when it became clear that rate hikes were over
December of 2023 marked the third consecutive meeting in which the Federal Reserve opted to leave interest rates unchanged. Since I'd been following the Fed's meetings, I knew that three rate hike pauses in a row was likely an indication that the central bank was done raising rates, period.
So what I did immediately after that December meeting was open another 12-month CD, even though that was a bit off schedule based on my laddered approach. My logic was that rates would soon start to fall, and I wanted to get in at a time when I could earn more interest on my money.
It turns out I was right. My bank's current rate on a 12-month CD is no longer as high as it was in December.
3. I kept enough money in my regular savings to cover myself for emergencies
When CD rates started rising, I was very tempted to move as much money as possible out of my savings account. I know full well that the rate on a savings account is never guaranteed, whereas with a CD, your rate is locked in for the duration of its term.
But still, I was careful to keep enough money in savings to leave my emergency fund intact. Many people opt to leave enough money in emergency savings to cover three to six months of essential bills. I like to aim a bit higher due to factors that include being self-employed and having a variable income.
It would've been nice to earn a little more money on some of my emergency cash last year. But keeping it accessible in savings was the right move.
Case in point: Late last year, I had to replace the heating system in my home, and it cost me about $12,000. Had I moved too much cash out of emergency savings and into a CD, I would've been in a tough spot.
You can learn from my wins
The reason I'm sharing these smart banking moves from 2023 is not to be boastful. Rather, it's to underscore the importance of laddering CDs, paying attention to interest rate hikes in the context of opening CDs, and keeping yourself covered for emergencies.
At this point, CD rates remain attractive, but this could change in the course of 2024. So if you have money you don't need for emergencies, consider opening a CD in the next few months. But also consider laddering your CDs to reduce your chances of having to cash out early and face a penalty. And no matter what decision you make as far as CDs go, aim to leave yourself with enough emergency savings to cover three full months of bills at a minimum.
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