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In the beginning of 2023, I decided I wanted to switch up my financial strategy.
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I spent the past few years investing my cash in individual stocks, index funds, and in cryptocurrency. After a series of costly trades, I looked at my financial portfolio and realized that I wasn't being smart with my money. My investment strategy was too risky and I was losing more money than I was comfortable with.
I decided that this year, I wanted to earn better returns on my cash and decided to put most of my money into a high-yield 1-year CD over letting it sit in index funds or inside a high-yield savings account.
Here are the three reasons why I'm happy I made that decision.
In order to rebuild my financial portfolio and make sure that I grow my net worth this year, I decided to put the money in a CD where I'm guaranteed a 4.75% APY payout on the money I put in when the CD matures in February 2024.
For example, if I put $50,000 into a 4.75% APY CD, by the end of the year, I'd earn $2,375. If I put the money in a high-yield savings account at the same interest rate, there's no guarantee that rate would stay the same over 12 months. It could fluctuate to 4% or drop down to 2%. My payout would be varied and isn't predictable.
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If I put my money in an index fund, there's a chance I could make more money at the end of the year, or in a few years, if I kept the money sitting inside the fund. However, I could also lose money if the market goes down or the stocks inside the fund take a hit because of inflation, the economy, or other factors out of my control.
In previous years, I was willing to weather the ups and downs of the market and kept a big chunk of cash in stocks and index funds, but I lost too much money, too fast. Instead, this year, I'm looking to reduce my risk exposure so that I can earn back some of what I lost in the market over the years.
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A big perk of putting your cash in a high-yield savings account or an index fund is that you can access the cash, fast and without a penalty, if you need to take it out and use it for something else.
With the CD I have, there's a penalty to withdraw the cash before the CD matures. While the amount that I'd be charged varies, it would still eat into the profit I was hoping to make by keeping my cash in a CD.
Since most of my net worth is locked up in that CD, I planned in advance that I would keep enough cash out in case of an emergency. I calculated how much I spent over the course of four months, from bills to rent, and put that cash into a high-yield savings account.
That way, I have a four-month runway of liquid cash to use if I lose my job and need to access cash fast, without having to dip into the CD.