Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion about certificates of deposit, or CDs.
Then we pivot to this week’s money question from Max, who asked about the best use of a big windfall of money. He wrote, “I'm currently going through a divorce (it's OK, it's for the best) and I will be getting approximately $100k from it. I'm moving into my own apartment and have no debt except for less than $10k of credit card debt and my student loans. I currently make around $130k per year at an extremely stable job.
My question is this: With the housing market heading towards a correction should I hold on to this money and wait to buy a house at as ideal of time as possible or pay off my debt?
A slight caveat to this, I owe approximately $150k in student loans. My thoughts are to use it for the student loan debt because once that debt is gone my life is changed forever for the better, but I could miss an opportunity to buy a home at a reasonable price.”
Check out this episode on any of these platforms:
Our take on CDs
Putting money into a certificate of deposit, or CD, has plenty of appeal when you can regularly find annual percentage yields from 4% to 5%, which is the case in early 2023. But high-interest savings accounts are also boasting APYs north of 4%, so which savings vehicle should you choose if the interest rates are the same?
A CD guarantees a fixed interest rate, usually higher than those offered by regular savings accounts, over a set period of time. CDs often impose a penalty if you withdraw money before the term is up, so they’re probably not the best place to store money that you need in the near future. But if you know you won’t need the money for a while and don’t want to be tempted to spend it, a CD is a safe option. For those who want easy access to their cash, a high-yield savings account probably fits the bill.
Our take on the best uses of a money windfall
Coming into a life-changing sum of money can feel overwhelming, not least because of the many decisions that must be made about that money. Let your values and money goals drive your choices. While there will be plenty of variation among individuals, financial planners generally list saving for retirement, building an emergency fund and paying off high-interest debt as top priorities. Some people may be tempted to use a big influx of cash to pay off a house or student loan debt. Note, though, that interest on a mortgage and student loan can be tax-deductible, and if the interest rate on those debts is low, you may profit more by investing money in the stock market, which has produced average returns of about 10% per year for nearly the past century, as measured by the S&P 500.
Our tips
- Weigh your options: When you get a windfall, think about how to use it to make progress on the financial goals that matter most to you. You might be able to do multiple things at once.
- Think about returns: Paying off student debt can lift a psychological — and financial — burden, but you could see better financial returns by investing for your retirement.
- Consider a splurge. You could use 10% of any windfall to buy or do something fun.
Have a money question? Text or call us at 901-730-6373. Or you can email us at podcast@nerdwallet.com. To hear previous episodes, go to the podcast homepage.
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The article Smart Money: Are CDs Worth It, and Managing a Life-Changing Windfall originally appeared on NerdWallet.
