Photo: Flickr via hdk
If your income, including tax refunds and bonuses, have a habit of living in your checking account, you could be opening yourself up to financial turmoil by fueling shopping addictions with easily accessible funds.Fortunately, your bank can temper the temptation of hazardous spending with long-term savings accounts like a long-term CD.
A survey of 2,000 women by OnePoll found that women in particular spend about 170 hours per year shopping for clothing, shoes and accessories. Moreover, women venture on 90 shopping trips annually for clothing, shoes, accessories and toiletries.
Unlike the common misconception that women tend to overspend more, men are also susceptible to careless purchases and can benefit from a long-term CD to get financial savings in check.
According to an Integer marketing study, men are less likely to to be “price sensitive” compared to their female counterparts, as only 39 per cent of male shoppers look for cheaper items in stores. This behaviour may be attributed to men’s desire to get in and out of stores faster.
With so many factors influencing spending — for women, this may be overspending on impulsive items while browsing aisles, or for men, a lack of price-conscious shopping awareness — investing in CDs can be a great way to reign in spendy habits.
Sock Funds Away by Investing in CDs
There are many investment options available that you can use work bonuses or monetary gifts toward, but they often have drawbacks that investing in CDs don’t possess.
Some long-term savings options pose a high risk, while other deposit accounts like a checking account or savings account can be too accessible to the point that savings are squandered away little by little on new shoes or a flashy watch that you promise you’ll pay yourself back for (but never do).
While current CD rates aren’t what they once were in their heyday, long-term CD accounts solve the problem of not being able to lock funds away. Today’s 2-year CD rates are at an average 0.47% APY, according to the Federal Deposit Insurance Corporation (FDIC) — not so appealing with regard to return potential.
But with the sole purpose of setting your money aside untouched and away from the checkout counter, a 2-year CD or even a longer-term account can keep retail therapy at bay. The rationale behind this approach is that withdrawing funds against the CD account will result in penalties against your earnings — and if you haven’t allowed the long-term CD to grow interest yet — possibly your principal deposit.
This monetary loss is what prevents shopaholics from the urge to spend their money, because unlike spending money in a checking account on a new sweater, by withdrawing from the CD prematurely, you’ll get nothing in return. No sweater, no interest, no savings.
When to Use a Long-Term CD for Savings
Before jumping into a long-term CD, you should evaluate your personal economic conditions, such as total income, monthly bills, emergency savings fund status and expendable income after all these factors have been accounted for.
The “locked-in” nature of CD accounts means that they may not be ideal for those who are living paycheck to paycheck, or for those who have not grown a separate emergency savings cushion for life’s what-ifs. When unexpected financial challenges arise, pulling funds from CD accounts can lead to drastic penalties and wasted money.
If you’ve already established a healthy rainy day fund, opening a 2-year CD (or longer) and taking advantage of long-term CD rates can be a promising avenue for habitual spenders.
Current CD Rates Aren’t Bad Everywhere
If setting your money aside is a financial goal, but the current CD rates from the FDIC’s rates update has you still a bit hesitant, keep in mind that this percentage is simply the national average.
Many financial institutions, primarily local banks, online banks and credit unions offer competitive interest rates that can curb your retail addiction while earning you a decent return on principal funds compared to a regular savings account or checking account.
For example, 2-year CD rates from these institutions are at an average 1.20% APY, which is still a significant return, especially if your money would’ve been otherwise spent on feeding your closet with piles of clothing.
Buckling down with a long-term savings plan can be challenging, but not having money to put toward your future financial stability can cause much more heartache later on.