The fees and other penalties you may face are another factor in deciding how to diversify your cash portfolio.
Because certificates of deposit (CDs) are time deposits, there is usually a penalty for early withdrawal. In most cases, it means losing some or all of the interest that would have been paid on the account.
Penalties
There may be some ways to minimize the potential problem while still taking advantage of CDs. One solution is to ladder your CD investments, which means that instead of buying one large CD, you buy several smaller ones with different maturity dates. If you have CDs coming due every six months or every year, it may be easier to avoid withdrawing before maturity.
If you know you'll need your CD assets on a certain date, you may be able to arrange an individualized CD with an unusual term, say seven or nine months. That way, you don't lose any potential interest and you have the money when you need it.
You may also owe fees if your money market account or money market fund falls below the required minimum. If you have no choice but to use the money, it may be smarter to close the account entirely than to pay monthly fees that are likely to wipe out any interest earnings.
With U. S. Treasury bills, you avoid sales charges by handling transactions through a Treasury Direct account. And if it seems likely you may need your money, you can stick to 4- or 13-week bills. Having to renew regularly takes a little more time, but it should prevent having to sell before maturity.
