Investment update
Posted on November 8, 2006 14 Comments
Thanks to the knowledge of some savvy posters, I slightly changed my plan to invest in a CD. You see, I was originally trying to find a CD at Emigrant Direct, but for some reason couldn’t find info for it on the home page. That’s why I bounced over to ING.
However, after reading the postings and giving Emigrant Direct a second look, I learned that Emigrant Direct does offer CDs, you just have to open an American Dream savings account to hold one. So I opened an account there and will be moving the money into a CD just as soon as the account is verified. The Emigrant Direct CDs have a teensy bit better yield than ING (5.20 vs. 5.10), and it’s only locked in for 6 mos., so it alleviates a bit of my worries in case Brian and I have to move to the western burbs in May 07. Now the option of buying a condo will be open, if needed. However, if we stay in Oak Park and don’t need to buy, I can just reinvest in a new CD for 6 more months. Good plan, right?
Oh, a word to those who thought a 6-mo. CD at 5.20 percent was “way better” than a 12-mo. CD at 5.10 percent. The percent you’re looking at is most likely an APR (Annual Percentage Rate) or APY (Annual Percentage Yield). Given that the rate is annual, you’re not going to come away with 5.20 percent gain when your 6-mo. CD matures. You’d still need to leave your money in the CD for 12-mos to get the whole 5.20 percent gain.
In other words, if I put $1,000 into a 6-mo. CD at 5.20 percent, I will only get $26 of interest – not $52 – if I cash out the CD after 6 months. I’d need to leave the money in the CD for 12 full months to get the whole $52.
Phew! It’s so complicated. But I hope that all made sense. Anyhoo, I feel pretty good about my choices and am terribly excited to get the ball rolling!
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November 8th, 2006 @ 6:11 pm
Well put! …someone had to explain that one to me a while back. =)
November 8th, 2006 @ 6:21 pm
But why not open a savings account at HSBC or ING Direct and get that kind of interest but still have money to withdraw when ever you want (ok max 6 times a month) With that option you get slightly less interest but you have money available to you when you need it. Current HSBC savings is 5.05% APY and ING is about 4.40%
November 8th, 2006 @ 8:46 pm
IF rates suddenly drop, Tanya, she’d
have the 5.2 rate for a while longer.
No one knows which way rates are going,
of course….and on a cd with a six
month term, you’re right, even a
sharp drop in short term rates won’t
make THAT much of a difference. Playing
the rate game is always a bit of a
gamble, LoL….
November 9th, 2006 @ 6:56 am
I thought about it too sometime back. But the savings rate at Emigrant is 5.50% …so for each $1000 you are going to earn just $1.5 extra on the CD over the year. So I really needed a lot of money to justify a CD with just that gain. Didn’t opt for it ultimately.
Emigrant’s rate is an APY not APR…the corresponding APR is something like 5.0%
November 9th, 2006 @ 6:57 am
Sorry, I meant Emigrant rate is 5.05% …not 5.50%, in the above comment.
November 9th, 2006 @ 4:52 pm
…But why not open a savings account at HSBC or ING Direct…
I think another influential factor for BB is the fact that a CD forces her to not touch the money. An ING account (which is great, i have one myself) offers slightly less interest plus easy access to the money the next time she sees those Manolos calling her name — something she’s trying to avoid.
I think that’s the idea.
November 9th, 2006 @ 6:22 pm
If the rates drop, it will impact all savings accounts and future CD rates but at least, by opening a CD, you have locked in the rates for the specified term. I personally like DCU which has a 16-mo CD currently yielding 6%.
November 9th, 2006 @ 6:51 pm
Congrats on establishing a CD! They are excellent but very safe vehicles for saving–liquid enough that you can get to them, but the penalty in interest for early withdrawal is additional incentive to leave the money alone.
November 9th, 2006 @ 8:12 pm
BB, congrats on establishing a CD! I’ve been reading up on things like that myself and have seen another suggestion of going with a money market account instead. Anyone have thoughts on those vs. CD’s?
November 10th, 2006 @ 8:45 am
> BB, congrats on establishing a CD! I’ve been reading up on things like that myself and have seen another suggestion of going with a money market account instead. Anyone have thoughts on those vs. CD’s?
There are two types of money markets, one offered by banks, and one offered by brokerage houses (mutual funds). The bank ones are FDIC insured and typically don’t pay very good rates. The mutual fund ones are not FDIC insured but tend to pay higher rates. Even though the latter are not FDIC insured, they are still extremely safe and NOT ONE has ever lost the principle. The mutual fund companies would soon rather pay any lost money out of their own pockets rather than be known to be the first company to ever break this trend and permanently lose investor confidence. So I recommend the latter since its safe and gives a good rate.
But a brokerage money market is not that much different than a high yield savings account in terms of rates. Compared to a CD, it has the same problem. A money market is totally liquid so the interest rate you earn changes daily. With a CD, you can lock in the rate. Also, a high yield savings account (like EmigrantDirect or HSBC) is actually a little more stable. The banks tend to change their rates less frequently. If you think the rates are going to rise, then you might be better off in a money market because they may reflect higher rates more quickly. But if you think rates are going to fall, you might be better off in savings accounts because the banks may eat some of the cost for awhile to keep your rates up.
Also, keep in mind that money market funds charge expense ratios. You want to find a good money market that pays a high yield but also has low expenses so they don’t eat all your earnings. I like The Vanguard Group’s money market called “Prime Reserve”. They pay a pretty good yield and have low expenses. However, also keep in mind that there might be a minimum amount (unlike EmigrantDirect, etc). For disclosure, I have accounts with both Vanguard and EmigrantDirect.
At the end of the year though, there seems to be very little difference between Vanguard’s money market returns and EmigrantDirect’s returns.
So, figure out if you want to lock in a rate (CD) or want liquidity (high yield savings/money market). If you want liquidity, then you can either pick one or the other or hedge your bets by picking both. You might look at what you want to do with the money too. If you need the money close and easy to transfer into your checking account to make a puchase, the saving’s account might be easier. If you are thinking about using the money to invest in other things (short term bond funds might be worth considering if you are willing to take on slightly more risk), then keeping it at a brokerage account makes things easier.
November 10th, 2006 @ 2:53 pm
I used the great rates offered by ING and Emigrant to persuade my local bank to give me a better deal. Weird how they are willing to work with you so they don’t see that money transfered elsewhere. I guess they knew I meant business since I did move a lot over to Emigrant last year when my CD’s matured.
November 12th, 2006 @ 5:05 am
http://www.eloan.com Savings Account
5,000 to open (500 min. after)
5.5% (.3% higher then your CD with full liquidity)
November 27th, 2006 @ 8:24 am
gmacbank.com
5.26% savings account
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