By: Steven Porrello | Updated – First published on Jan. 7, 2024
If you’ve been tuned in to the high rates on certificates of deposit (CD) this year, you’re probably aware that the party is almost over. Word on the street is that the Federal Reserve could start cutting its federal fund rate next year, which would directly impact the APYs that banks offer on CDs and savings accounts. While many 12-month CD rates are still above 5%, there’s no telling how long they’ll stay that high.For CD shoppers, that means now might be the best time to ladder high CD rates before monetary policy pushes them back down. Here’s why.CD ladders give you some flexibility with your savingsCD ladders combine short and long terms to help you access your savings at regular intervals. For example, if you had $25,000 in savings, you could divide your money between CDs of different maturities, such as $5,000 in a three-month CD, $5,000 in a six-month CD, $5,000 in a one-year CD, $5,000 in an 18-month CD, and $5,000 in a two-year CD. That way, you’re never more than six months from accessing a portion of your savings.Laddering CDs like this can solve one of the main problems with CDs: the early withdrawal penalties. Most CDs come with a penalty equal to a set period of interest for any withdrawals before maturity. For instance, an 18-month CD may charge you 180 days of interest if you liquidate your CD before the 18 months are over. Even worse, you’ll pay that penalty regardless of if you earned 180 days of interest, which would be a loss of your principal if you didn’t.CD ladders could also solve the problem of partial withdrawals. If you’re withdrawing before maturity, most CD providers require you to liquidate the entire balance — even if you just want a small portion of your savings. Laddering CDs, however, would spread your money out and could help you leave some of your money invested. For instance, if you needed $5,000 to cover a surprise HVAC repair, you could liquidate one of your five $5,000 CDs, leaving $20,000 still invested in the others. You’d still pay a penalty, but it would be less expensive than liquidating a single CD worth $25,000.Why you shouldn’t wait to ladder your CDsBy and large, the main reason for laddering your CDs is to lock in today’s high interest rates before they disappear.Already, many short-term CD rates are starting to creep back. Banks and other financial institutions are speculating that the Fed is finished with its cycle of interest rate hikes, and it’s adjusting CD rates accordingly. If inflation continues to cool, it’s likely the Fed would start cutting the federal fund sometime in 2024, which would essentially spell the end of this era of high interest.A CD ladder would lock you into today’s high rates for a period that could extend five years. The idea is that you could be earning high interest at a time when the ongoing rate is several times lower. In essence, you’d get a guaranteed stream of income paying out at a higher-than-average rate.All in all, if you’ve been contemplating building a CD ladder, now might be the time to take action. Rates aren’t going to stay this high for much longer. Take a look at some of the top-paying CDs and start planning out your CD ladder before it’s too late.
By: Maurie Backman | Updated – First published on Jan. 9, 2024
There’s a reason putting money into a CD versus a savings account can be beneficial. CDs require a commitment that you’ll keep your money in the bank for a specific period of time. As such, CD rates tend to be higher than savings account rates.Also, when you keep money in a savings account, the interest rate there can change with market conditions. When you put money into a CD, the rate you lock in is the rate you’re guaranteed for your CD’s entire term.So, let’s say you open a 2-year CD paying 4.5% interest. Let’s say you also keep some money in a regular savings account paying 4%. A year from now, your savings account might only be paying 2%, and new 2-year CDs might only be paying 2.25%. But because you locked in a CD for a duration of two years, you’re guaranteed 4.5% interest for another 12 months as long as you leave your money where it is.That said, if you’re going to put money into CDs, you’ll want to do two things:Make sure your bank is FDIC-insured so you’re protected from losses in the event of a bank failure.Ladder your CDs so you have money coming due at various intervals, as doing so could help you avoid early-withdrawal penalties.It pays to ladder your CDsFiguring out whether your bank is FDIC-insured is easy. First of all, your bank will usually indicate whether it’s FDIC-insured on its website. And if not, you can look up your bank here.Laddering your CDs requires a bit more time and strategy. But it’s really not a difficult thing to do.With a CD ladder, all you’re doing is splitting your money into different CDs with different maturity dates. That way, you have money coming due at varying intervals.Why is this important? You might think you’re okay to tie up, say, $10,000 in CDs because you don’t need that money for something specific. But what if a major home repair comes up that depletes your emergency fund and still leaves you in need of cash?In that case, if you have to wait another year for your $10,000 to free up, you might end up resorting to debt. But if a portion of that money is about to become available, you may not land in such a jam.To this end, what you may want to do is take the total amount of money you’re looking to put into a CD and split it into four. And then, open CDs of varying terms.If you have $10,000, that might go as follows:You open a $2,500 CD with a six-month termYou open a second $2,500 CD with a nine-month termYou open a third $2,500 CD with a 12-month termYou open a fourth $2,500 CD with an 18-month termThis way, you have CDs coming due at different times, giving you an opportunity to access your money.And you may not even need that money for an emergency. You may simply want some cash to join friends on an exciting trip, or you may decide you’d like to invest in conjunction with certain market conditions. If your money isn’t all tied up, those options may be available to you.Do your best to avoid a penaltyOnce you open a CD, it is possible to access your money prior to its maturity date. However, doing so usually means facing a costly penalty, the amount of which will depend on your bank and its policies.At Capital One, for example, you’ll lose three months of interest as a penalty if you cash out a CD with a term of 12 months or less prior to maturity. For any CD with a term longer than 12 months, that penalty is six months of interest.That interest income is money you really don’t want to lose. But if you’re careful in how you set up your CD ladder, you can certainly lower your risk.
By: Christy Bieber | Updated – First published on Sept. 5, 2023
Incomes vary widely across the United States, with some people making many times the amount that others earn. If you’ve ever wondered how your personal finances stack up, and what “class” your income officially puts you in, here’s what you need to know.What income do you need to be upper, middle, or lower class?Based on 2021 data, here’s what you would need to earn in order to be in each class:Lower class: This is defined as the bottom 20% of earners. Those in the lower class have an income at or below $28,007.Lower middle class: This is defined as individuals in the 20th to 40th percentile of household income. Earnings among this group are between $28,008 and $55,000Middle class: The middle class is officially those whose earnings put them in the 40th to 60th percentile of household income. The income range is $55,001 to $89,744.Upper middle class: Anyone with earnings in the 60th to 80th percentile would be considered upper middle class. Those in the upper middle class have incomes between $89,745 and $149,131.Upper class: Finally, the upper class is the top 20% of earners and they have incomes of $149,132 or higher.Take a look at these numbers and see where you fall based on your own earnings. And remember, this is a snapshot in time — your earnings can change throughout your life, and so can your class designation.Will your success be determined by your income and class?It’s probably not a surprise that those in the upper classes or in the upper middle class do have a higher net worth than those in the lower class or the lower middle class. But the disparity is greater than you might think. While the median net worth of those with incomes of $149,132 or higher is $805,400, the median net worth of those in the lower class is just $12,000.Your income impacts how easy it is for you to build wealth. If you make more money, it is easier to save it and invest it in a brokerage account where it can work for you. If you make less money, then you may struggle even to cover the necessities out of your checking account, much less to buy valuable assets that help you grow richer over time.But that doesn’t mean people who don’t make a lot of money can’t be a financial success. A lot depends on what you do with the money you actually have, including how much you spend and how much you save.There are plenty of people who make over $100,000 a year who live paycheck to paycheck, and plenty of people with incomes that put them squarely in the lower or lower middle class who have diligently saved and grown quite wealthy over many years.Here’s how you can improve your standingDon’t be discouraged if you aren’t in the class you hope to be. For one thing, you have opportunities to increase your income by taking the following steps:Learning new job skills: You could obtain a certification, take part in a management training program at work, or take some classes to develop skills that may help you get promoted (such as computer training courses or public speaking classes), depending on your industry.Take on a side hustle: The average side hustle brings in $483 per month, which is a good amount of extra money that could make a meaningful difference in your income.Work some extra hours: If your company allows you to work overtime, take advantage of it, as many people are paid time and a half for overtime hours.Negotiate your salary: According to Pew Research, when workers negotiated for higher pay, 28% said they received the extra money they asked for and 38% indicated they were given more than originally offered but less than their ask. Whether you are getting a new job or staying at your current job but feel you’re underpaid, it doesn’t hurt to make a request for more money — especially if you can find salary data to back up the fact that others in your industry are paid more.And even if your earnings never put you in the top 20% of earners, you can still have a rich life and end up with the financial security you deserve — especially if you prioritize saving as much as you can for as long as you can.
By: Maurie Backman | Updated – First published on Dec. 6, 2023
When my brother got tickets to be in the audience of The Price Is Right, he figured it would simply be an entertaining way to spend a day off. He didn’t imagine his name would actually be called during the show’s opening round.But lo and behold, my brother was one of the first four contestants asked to come on down and participate in the iconic show that has you guessing at prices of various consumer goods. And as luck would have it, my brother was able to out-bid his competitors and move on for a chance at a new car — a car he won through savvy guessing, but also, a nice amount of luck.My brother was ecstatic to have won such an awesome and valuable prize. But that prize wound up being a bit of a mixed bag.Taking the money and runningMy brother won a Hyundai Elantra with an estimated value of $25,415. He was happy to have won the car, but there was a problem — he already had a vehicle and didn’t need a second one. And he certainly didn’t want to have to bear the cost of auto insurance for a vehicle to largely just sit in his driveway.Thankfully, my brother was able to work something out with the dealership. Instead of keeping the Elantra, he was able to use the roughly $25,000 credit he got to buy a used car from them and then sell it back for $21,000, which he took as cash. This route was worth it for him because sales tax and registration for a new Elantra would’ve been about $4,000. And now, my brother has a pile of cash he can add to his savings account instead of a car he doesn’t actually need.Gearing up for a giant tax billMy brother won two prizes on The Price Is Right — a grill package worth about $1,400 and the Hyundai Elantra. All told, it’s more than $26,000 in winnings.But now, my brother is going to be looking at a pretty hefty tax bill on his prizes. And it doesn’t matter that he took cash for the car. He’s looking at paying that tax either way.The exact amount will hinge on his total tax situation. What’ll probably happen is that my brother will receive a tax form from the game show summarizing the value of his winnings, and he’ll need to work with his accountant to figure out what it will cost him.As a very basic example, let’s say you win $20,000 on a game show and fall into the 24% tax bracket based on your income. You might, in that case, end up having to pay as much as $4,800 on your winnings. If that $20,000 is a cash prize, you could simply reserve some of it for your tax bill. But what if you win a $20,000 vacation package, or $20,000 in furniture? It’s not like you can send the IRS a dining room chair or a loveseat and call things even.So be very careful when you’re looking at taking home any sort of game show prize. You may even want to meet with an accountant before applying to be on a game show to get some advice.The good news is that my brother stands to gain something financially either way. But imagine you were to receive a $26,000 bonus from work. That’s a great thing. But you’ll likely end up losing a large chunk of that $26,000 when you account for the portion you owe the IRS.All told, my brother is grateful for his experience and now has a really fun story to tell. But if you’re planning to audition for a game show in the hopes of walking away with a huge amount of cash or a set of prizes, do know that winnings like that are considered taxable income. And it might take the input of a very seasoned accountant to help you reconcile your tax bill after coming away with that sort of haul.
