Lots of people are avoiding certificates of deposit these days.
That's understandable. With a few exceptions, CD rates are terrible right now, and the spread between a typical one-year CD rate and a high-interest savings account is vanishingly small. Savings accounts allow you to withdraw money at any time without paying an annoying early withdrawal penalty, so most people go with them over a CD with a similar rate.
But that early withdrawal penalty isn't always a bad thing. The threat of losing a significant chunk of principle -- as much as 3 percent at some banks -- can enforce discipline in a way that a savings account capable of transferring large amounts of cash into your checking account at the touch of a button can't quite match.
So here's an idea for how to use CDs in 2013: Send a present to your future self. The next time you get some sort of a windfall -- a holiday bonus or a tax return -- take a portion of the proceeds and open a one-year or five-year CD with it. As you wait for it to mature, plan a vacation around that money, a day shopping at the mall or the new TV you're going to buy -- whatever floats your boat.
All the while, that CD withdrawal penalty will be sitting between you and your money, ensuring you won't fritter that money away on fleeting pleasures, and in the meantime you'll get the fun of planning out your purchase.
There's some scientific support for the idea of maximizing the enjoyment of a purchase through delayed gratification. From British psychologist Jeremy Dean, author of PsyBlog and author of "Making Habits, Breaking Habits":
You know that feeling you get when you're dreading giving a public talk or going to the dentist? That is the negative power of anticipation, but it also works the other way. We get enormous amounts of pleasure from looking forward to good things in the future (Bryant, 2003).
This is part of the reason why our modern consumer society of "buy now and pay later" robs us of pleasure. Part of the fun of purchasing both objects and experiences is in the anticipation. Waiting for good things to come is fun.
There's a part of our minds that thinks we'll enjoy it more if we get it right now, but that part is the greedy part. And it's wrong.
You might think that what we lose in anticipation, we'll gain in reminiscences. In other words, we'll get the pleasure of the other side of our purchase. But this doesn't seem to be the case. The pleasure that people get from their anticipation is stronger than from their reminiscences (Van Boven & Ashworth, 2007).
This may be partly to do with the Zeigarnik effect -- the idea that something tends to stick in our mind until it's completed. In the same way, once objects or experiences are "obtained," our mind forgets about them. But while they're still in the future, we keep mulling them over.
In my experience, Dean is spot on here. No matter how awesome an experience is, there's always a little letdown when it's over. So why not add a little extra flavor to your mad money by letting it marinate for a while?
What do you think? Do you ever stash money in a CD for a future spending spree?