Ten years ago, opening a certificate of deposit required $5,000 and an hour at the bank. Today, you only need $1 and five minutes. Take advantage of that to help minimize early withdrawal penalties on CDs.

One of the biggest risks to saving with a CD is that you may need the money before it matures. On CDs with maturities of less than twelve months, the penalty is usually between 30 and 90 days of interest (one to three months). On CDs with maturities of twelve months or more, the penalty is usually 180 days (six months) of interest. If you close a CD within three months of opening it, you could end up losing money.

The solution? Divide your savings into multiple CDs so that if you do need access to the funds, you don’t have to withdraw the full amount of your savings all at once. This lets you take advantage of CD rates while mitigating one of their biggest risks.

For example, let’s say you have $5,000 to save. You should open five $1,000 CDs so that if you need the money before maturity, you only have to cash in CDs in $1,000 increments (and thus pay penalty in the smaller increments). There is no additional financial cost to opening up multiple CDs, it’ll just cost you time.

Have you used this strategy?

Jim writes about personal finance at Bargaineering.com.

Photo: paulcarnevale

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