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Personal cash management often involves a complex balance of spending and saving. If you’re holding too much cash, it means you’re missing out on investment opportunities. On the other hand, cash is a critical component of personal finance and allows you to cover both expected and unexpected expenses of daily life.

This makes certificates of deposit (CDs) a simple and useful solution when looking to manage personal cash in a safe and flexible way.

Using CDs for short- and long-term cash management

At any point in life, particularly during retirement, income streams can exceed expenses. When this happens, individuals are faced with a rather welcome problem – what to do with that extra cash? While investing surplus in your personal cash flow is a wise choice, you’ll also want to ensure you’re meeting your short-term and long-term liquidity needs. Because of this, any investment of funds from personal cash should first consider liquidity, or the ease at which you can access your cash for planned purchases, daily expenses, and unexpected emergencies.

When it comes to short-term savings goals for planned purchases, investing personal cash in FDIC-insured CDs that correspond to the time you’ll need the money on-hand provides safety, flexibility, and growth. Seen as low risk, CDs mature at varying dates, meaning you’ll have guaranteed access to the principal and interest on the date you need it. Therefore, if the purchase is further away, a long-term CD will allow you to meet this purchase with a higher annual percentage yield

Emergency funds are an essential part of any personal cash management plan. Ideally, it’s suggested to have three to six months of cash available to cover unexpected events and expenses. Putting some of this money into a CD ladder – a savings strategy in which you divide your money into multiple CDs that mature at staggered times - allows you to have access to your cash on a revolving basis. With this strategy, your emergency fund earns more than it would in a traditional savings account without being locked away for too long.

For living expenses, flexibility is essential. Short-term CDs can be a valuable savings tool when looking to keeping cash for living expenses in a low risk, flexible investment. With the shortest CD terms, you have the greatest amount of flexibility and access to your cash. When these CDs mature, you have the option to reinvest funds that aren’t needed, or you can simply withdrawal your principal and interest without penalty.

Picking the right CD terms is key to managing personal cash

The key component to using CDs for personal cash management is to find a CD with a maturity date that fits your needs. Make a thorough assessment of your cash flow and be aware that early withdrawal of funds placed in a CD will likely incur a penalty, potentially costing several months of the interest earned.  

Using CDs as a tool to balance your spending and savings can help bridge the gap in long- and short-term personal cash management. When well planned, CDs can allow for consistent and flexible access to your cash while providing safety, flexibility, and financial growth.

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