Discover Your Money Personality
In the discussion on the post about how to setup laddered certificates, Mark Anderesen made a comment that touched on the money personalities of people.
When you evaluate a financial product or service, you need to take into account your own money personality to determine if the product or service is appropriate for you.
While using a CD ladder will mean you actually earn a slightly lower interest rate than using a premier online savings account, that might be perfectly acceptable if the liquid savings would be a temptation to you. As Mark noted, his wife’s money personality is such that she would spend the money if she has it. In that case, the CD ladder likely makes a great choice because it removes some of the liquidity of the money as you would forfeit interest if you withdraw the cash before the CD maturation.
My money personality is such that I do not have the temptation to spend money that resides in our online savings account. My wife tends to spend money if it is left in our checking account but resists the temptation when the money is set aside in a specific savings account. Therefore the CD ladder is not the best option for us from a financial standpoint and we utilize the slightly higher interest rates of the online savings accounts.
This demonstrates that you really need to take some time to honestly assess your own money personality. Are you the type of person that will spend money if it is readily available? Are you able to have liquid funds and resist the temptation to spend that money?
What works well for one person may not work well for you. Once you are able to discover your own money personality, you will be better suited to determine which financial solutions will work the best for you.
The other thing to note is that in the future, as interest rates go up again, the CDs will start outperforming the savings/money market accounts again too.
Also note that part of the reason online banks offer better rates is because their customers will forget how to access their money.
They won’t actually say that of course, but if grandma moved all her money to an online account and then passed away, who would know how to access it? If the family didn’t know she had an account there, they won’t notify the institution of the death, meanwhile the institution is using all of that retirement money.