CDs – Not just for listening pleasure!
Posted on March 22, 2005 11 Comments
Thanks to everyone who brought to my attention just how poor my writing is when I complain and feel sorry for myself. Sometimes you need to hear it to believe it! I promise to stop whining, get back on the horse and continue to provide you all with useful financial information.
That being said, I took a look at CD rates this weekend. Not for Gwen Stefani or The Yeah Yeah Yeahs (which would be my first inclination) but for Certificates of Deposit, an investment method. According to Ask Suze!….About Mutual Funds and Annuities, a CD is…
“a type of savings instrument issued by a bank or a credit union (or even a broker). Like individual bonds, they pay you a specified interest rate over a specified period of time, and pay back your principal at maturity.“
Got that? Me neither. Let’s decode for a moment. A CD, like Suze says, is an investment option. Typically, you’d buy a CD from the places listed above at a guaranteed rate. My bank (WaMu) currently offers a 3.2 percent interest rate for 12 months. (According to www.bankrate.com, the average is 3.14 percent.) Your interest is paid once your investment period is over (reaches maturity). If you take money out of the investment before the period ends, you’ll have to pay a fee.
From what I know of CDs, they are a solid option for shorter-term investments. For instance, if you have money sitting in a savings account and you want to buy a new car in 2 years, a CD can protect that money from the temptation to spend (because you’ll incur penalties) while earning a higher interest rate than your basic savings account.
CDs are considered conservative investment options because they have a guaranteed rate. But considering the price of inflation, roughly 3 percent, an investor won’t really be making any money, given the current 3.14 return rate.
One final consideration, given the Fed’s recent notice about rising interest rates, are variable rate CDs, which allow for interest to rise during the life of the investment. From what I’ve seen, banks are less likely to offer these, though I’ve noticed more financial institutions willing to “bump” the rate once or twice.
I’ve invested in a CD once before as a means to tie up my money for future use. After reviewing this information, I feel more knowledgeable on the subject of CD’s but think I should hold off because I have saved just enough for an emergency fund, according to the WaMu financial Web site. I may reconsider CDs as an option while saving for a downpayment once I have $2-3K over my emergency fund (in a basic savings account).
And who knows…with so many additional savings options available, maybe I’ll find one better suited to my needs once I’m able to do it!
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11 Responses to “CDs – Not just for listening pleasure!”
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March 23rd, 2005 @ 3:24 am
In the bull market days you could get very high rate CD accounts. About two years ago I put $5,000 into a CD account for 1 1/2 years…total payoff = $36.00
Only put your money into a low yield CD if you know you can’t make more elsewhere!
In a few years the rates should be somewhat decent, I hope!
March 23rd, 2005 @ 4:26 am
Don’t bother! You’ll barely beat inflation. You can find a money market fund that will offer a similar rate and you won’t be penalized if you need your emergecy funds for an emergency.
March 23rd, 2005 @ 2:08 pm
CDs can be a good safe investment (particularly in a ladder), but that WaMu rate is kinda “eh”. Emigrant is paying 3.25% APY and your money is entirely liquid. Even ING’s 1 yr CD is 3.4%
Keep your eyes out for the highest rate, the “average” can be deceptively low. Today’s highest 1yr rate is 3.9 from Corus Bank for example.
Happy hunting
March 30th, 2005 @ 10:49 pm
I’ve been thinking about laddering CDs myself. So many options!
April 3rd, 2005 @ 5:39 pm
Hmmm, all reasonable advice.
I have about 12K in my emergency account.
Far short of where I want it to be, but with
the extra income I bring in along with the
direct saving I do, it should double
annually.
I just built a CD ladder w/ the 1 year rung yielding about 2.5% (this was before
the Fed upped rates on the 22nd). I’m
thinking of building another ladder with
the higher rates. All of this is with one
of my credit unions. No sense is opening
up a bunch of scattered, small accounts.
I’m targeting 5K in cash available for
emergencies in the immediate future, and
growing that ratio in time.
My calculations show that short term
ladders with small denomination CDs (1K
seems to be optimal, but I’ll bet 2.5K
would work as well if you have the funds)
work best. YMMV. I need to code up that
CD ladder calculator I’ve been thinking
about. All the ones I’ve found online seem
too focused on a particular bank or
institutions products (BofA’s is kinda
nice, but obviously a bit biased; I hated
BankRate’s).
May 12th, 2005 @ 3:56 am
What is a CD ladder? I’d like to learn more about it and maybe post on the site about it.
July 25th, 2005 @ 3:41 pm
A ladder is a series of (usually) 5 CDs opened at the same time, probably for the same amount, but with different maturity periods. I think the most common is to open a 1year, 2year, 3year, 4year, and 5year (with the 5year having the highest yield, usually).
When the 1year comes to term, reinvest the money in a 5year. Same with the 2year, 3year, and 4year.
So then, after 4 years, you have 5 CDs all earning a high return (since they are all “long-term”), but coming due every year, so not all your money is locked away for the full 5year period.
January 4th, 2006 @ 3:54 am
Check out ingdirect.com. They’ve got really got rates on their CDs, their APY is variable and is better than average. Unlike what a previous poster {Neville} said, when you put in say $2500 like I did, your return after 9 months is $2578, not bad huh?
I’m a student so I don’t make much, but even their regular savings account has better rates than most banks. Either way, i’d rather my money work for me while I don’t use it rather than just lie useless.
March 21st, 2006 @ 12:04 am
remeber to consider the tax consequences of any investments you make. Its true that CDs are risk-free, but a typical CD will be taxed at your normal tax rate when it matures, meaning at the current yields the take home is pretty poor. If the yield is 4%, and your tax rate is 30%, your take home is 4% x .7. And like previously mentioned, you would like to outpace inflation, or your efforts at saving/investing are to no avail.
Certainly a better thing to do before getting into CDs is your 401k plan, which may also have an employer matching contribution (“free money”). And will reduce your taxable base by the amount you contribute, for a double win. And most importantly, it will grow uninterrupted by tax hits.
Secondly, you may consider long term stock market investing, especially thru no-low, low fee, broad based index funds, like ones offered by Vanguard. Don’t plan on touching this money for 10+ years, but over such a long time you can generally grow in a 8-12% range, and your gains are tax efficient and when you divest you will pay only Long-Term capital gains since you held for longer than an year. Long term cap gains are currently in the 5-15% range, and much lower than your general tax bracket. You can further minimize your investment risk by applying “dollar cost averaging” by adding a few $$ to the fund each paycheck. Check out sometime like the Vanguard Total Market INdex fund. No load w/ an expense ratio of one of the lowest in the industry ~.18%.
If you still have money left over you want to keep it highly liquid, its hard to justify bothers with CD when there are money market accounts that come very close in rates (ING, HSBC) without the lockup time.
Good job on the blog and keep saving!
-s
March 28th, 2006 @ 5:11 am
When I first starting having extra money to invest, CDs were a great way to earn a good interest rate. One-year CDs paid more than checking accounts, savings bonds, and money market accounts. And if occasionally you had to withdraw the money early and pay the “substantial penalty for early withdrawal” (which turns out to be no more than the interest you’ve earned so far), you’re still generally ahead.
Now the rates are barely more than savings accounts and savings accounts pay virtually nothing. Now online money market accounts (like ING Direct) are a much better deal–good interest and no penalties and no need for laddering. You just link it to your regular savings or checking account and transfer money between the two in a couple of days. This is what I now use for the money I’m saving for emergencies and other short-term goals.
April 22nd, 2007 @ 3:32 am
Hi,
We are running a cd rates blog at our website where ppl can sign in and post good cd rates at local credit unions etc.
Please provide your thoughts if you like. Thanks.