Single? Use CDs to meet your goals sooner

Certificates of deposit, or CDs, may seem like the sort of investment best left to money moguls--the Gordon Gekkos of the banking set. Anything with the word "certificate" in the title can seem a little too formal or complicated for someone who still files the EZ version of the 1040 tax form.

However, because they let you sock away your money at a higher interest rate, certificates of deposit can be a useful investment tool if you're single and looking to meet savings goals.

What are certificates of deposit?

A CD is simply a type of deposit account, like a checking, savings or money market account. The basics of CDs are that you agree to deposit a specific amount of money for a set period of time--three months, a year, or more. Like other deposit accounts, CDs are FDIC insured.

Just like with your savings account, the bank pays interest for the use of your money. CD interest rates are higher than standard interest-bearing savings or checking accounts because of the account's restrictions, just as a money market account may pay higher rates while restricting check-writing or withdrawal.

Use savings to meet mid-term goals

Consider some of these goals that may be in your near future:

• Buying a car
• Relocating to a different city
• Buying a first condo or home

These goals may be achievable for you in the next two to five years. The "forced savings" can keep you on target as you open several accounts that will mature--or reach the end of the CD's term--at or near your target goal date, giving you the cash you need to buy that new car or pay for moving expenses.

What if you need the cash sooner?

The main drawback of a CD, of course, is the agreement to leave your money alone for that six months or longer. You can withdraw your money, but, depending on the terms, you may lose some or all of the interest in addition to paying a penalty.

For that reason, CDs aren't the best choice for emergency fund savings or short-term goals such as a summer vacation. The best choices for those options will still be a high-yield savings account or money market account at a traditional or online bank.

Locked-in interest rate can be bad…or good

Another drawback is less relevant in these times of low interest rates: If the Federal Reserve raises its key interest rate, that increase will trickle down to higher yields in consumers' savings accounts. Not so much with the CD, where the rate is generally locked in for the term of the CD. During these times of irresistible force (the Fed) and immovable object (the prime rate), this is less of a concern. Using a "CD ladder" strategy in rolling over short-term CDs can reap the benefits and avoid the drawbacks.

Whatever you do, be sure to compare CD rates when selecting the best place for your money. Whether your goal is a new car or a new condo, the higher rates will get you there that much sooner.

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