CDs vs. Online Savings Account

[scootergmc]

I said he could do that down the road if he kept the money in a savings acct. Nice try though

Wasn't trying. Just having fun. Just like you were????

 

[JesasaurusRex]

Wasn't trying. Just having fun. Just like you were????

no, you!!!

 

[Spec-ECU]

Also, if your emergency fund is really large, maybe downsize it to 6 months of your current after-tax income and invest the rest in something more appropriate for a long term strategy.

Actually, that is our emergency fund, give or take.

You might consider keeping part of it in savings, enough to cover a smaller emergency such as an unforeseen car repair, and put the rest in a CD.

We have that, what I call intermediate emergency fund.

Anyway, I've picked a few more brains about this, and I've slept it off some more. There was also an option of splitting the funds between a CD and an online savings account. But I think until I'm completely decided, I should just put it in an online savings account for now. At least I can take it out anytime should I decide to do something else in the near future or years down the line.

This way I can focus on the next item on my list: 529 plans. (groans)

 

[Kewl Breeze]

Your situation is exactly when advisers like Clark Howard & moneyadvisor.com suggest "CD Laddering" so you don't have a long term CD with all of the funds tied up for a long period of time at a particular rate.

They suggest you take your money and split it into 5 even files and buy 1 of each of 1 yr, 2 yr, 3 yr, 4 yr, and 5 yr CDs.

The idea is that every 12 months when a CD comes due, you then turn around and re-up that money into a 5-year CD. So you always have access to 20% of your money being rolled over at what hopefully will be higher interest rates in the future.

I've been asked, "Well, why not buy just one 5-year CD instead?" Here's why: If you just need a portion of the money, you have to cash the entire CD in and start over again. Having 5 different ones gives you the same kind of flexibility you would have with traditional CD laddering.

http://www.clarkhoward.com/maximize-higher-interest-rates-long-term-cds

 

[Kewl Breeze]

p.s. I haven't done that myself yet but been meaning to for a long time.

 

[Yakoo752]

that's interesting

 

[Spec-ECU]

Your situation is exactly when advisers like Clark Howard & moneyadvisor.com suggest "CD Laddering" so you don't have a long term CD with all of the funds tied up for a long period of time at a particular rate.

They suggest you take your money and split it into 5 even files and buy 1 of each of 1 yr, 2 yr, 3 yr, 4 yr, and 5 yr CDs.





http://www.clarkhoward.com/maximize-higher-interest-rates-long-term-cds

Second time this has been suggested to me this morning. Hm. only limited-knowledge retort to that is; isn't compounding interest more effective the larger the principal balance?

But I'll have a read at that link. Thanks!

 

[CABilly]

When I was 15 I literally put all my money in CDs.


They take up a few boxes of space in storage and aside from a few rare TOOL sets, they're virtually worthless. No one wants to pay $17 for an original Limp Bizkit or Static X album so I didn't even break even

 

[Spec-ECU]

When I was 15 I literally put all my money in CDs.


They take up a few boxes of space in storage and aside from a few rare TOOL sets, they're virtually worthless. No one wants to pay $17 for an original Limp Bizkit or Static X album so I didn't even break even

That's why I still cash in on my CD's when slabbing on my '88 Ranger, yo.

 

[tgrrdr]

Second time this has been suggested to me this morning. Hm. only limited-knowledge retort to that is; isn't compounding interest more effective the larger the principal balance?

But I'll have a read at that link. Thanks!

in your case the principal balance would be the same, just split over 5 CD's. The downside (at least at my CU which is the only place I checked rates) is that shorter term rates are lower than longer term rates so you'd earn less interest on part of your money for the first four years, betting that would be offset by higher rates in subsequent years.

Term............Min Bal.............APY
1 Year..........$1,000.00..........0.45%
2 Year..........$1,000.00..........0.75%
3 year..........$1,000.00..........1.35%
4 year..........$1,000.00..........1.50%
5 year..........$1,000.00..........2.50%

 

[teg916]

in your case the principal balance would be the same, just split over 5 CD's. The downside (at least at my CU which is the only place I checked rates) is that shorter term rates are lower than longer term rates so you'd earn less interest on part of your money for the first four years, betting that would be offset by higher rates in subsequent years.

I have seen this strategy before, but a little different. Buy a 5 year CD each year with 1/5th of the money you plan on putting in total. Then you will have 1 CD mature each year.

 

[tgrrdr]

I have seen this strategy before, but a little different. Buy a 5 year CD each year with 1/5th of the money you plan on putting in total. Then you will have 1 CD mature each year.

That's the same thing I think. Except, the first year you buy CD's that are 1, 2, 3, 4 and 5 years. Each of the 2nd through 4th years you buy a 5 year CD with the money from the CD that matured that year. That way each year you buy one 5 year CD at whatever the interest rate is that year. Otherwise you're not getting much (if any) return on 80% to 20% of your money in years 1 - 4. Say you had $50,000, if my math is correct you'd earn $1,200 more buying the short term CD's the first year rather than waiting and buying a 5 year CD each year. You could also buy five $10,000 CD's but the risk to doing that is interest rates jump up (inflation?) and you're stuck with all your money at the lower rate.

Assuming you don't need the entire amount if you have five CD's you can limit your exposure to penalties by only withdrawing what you need. (Six months interest, at 2.5% on $50,000 would be $628 vs. $125 on $10,000) if that's significant or not.

Early Withdrawal Penalties
If you withdraw principal from a Certificate Account prior to maturity, an early withdrawal penalty will apply. Early withdrawal penalties on certificates with terms up to 47 months will equal the lesser of dividends earned on the Certificate or 90 days’ dividends. Early withdrawal penalties on certificates with terms of 48 months or longer will equal the lesser of dividends earned on the Certificate or 180 days’ dividends.

 

[tgrrdr]

I'd put that money into your house and get it paid off quicker. The 1, 2% yields are not even remotely worth it.

I would have agreed with this statement 100% until a few months ago. I was finally able to refinance at the end of last year and get rid of my second mortgage that was at 8% . Now the rate on my mortgage is pretty close to the rate I could get on a five year CD. I could see some people wanting to have the money in the bank vs. paying down the loan balance (a $50,000 lower mortgage balance wouldn't help pay your bills if you lose your job, a $50,000 CD would).

This way I can focus on the next item on my list: 529 plans. (groans)

Do you think a 529 is worth it? I've been thinking about putting more money into my 401k for college savings (assuming you're not already maxing out your 401k contribution).

 

[Spec-ECU]

Do you think a 529 is worth it? I've been thinking about putting more money into my 401k for college savings (assuming you're not already maxing out your 401k contribution).

Oh, don't ask me whether I value the American education system right now. That's an entirely different question.

That being said, I'm just trying to cover any financial bases for my household that we can since we can. I've had mandatory retirement at my work, and on top of that I took out a deferred comp plan and a Roth IRA. The wifey's going to need to aggressively contribute to hers to "catch up", but yeah, we pretty much have our main ducks in order.

 

[scootergmc]

After the Roth, I'd max an ESA (only $2k/year- but more options for qualified spending at the elementary/secondary levels) before moving onto the 529. Meanwhile, our legislators keep killing any chance of state tax deductions for 529 contributions. The bill has died in committee three straight years I believe.

 

[goodness-707]

Actually, that is our emergency fund, give or take.

I didn't mean to disparage. In fact I didn't even say it right. The fact that you have saved the money suggests you are earning more than your monthly living expenses. So instead of 6 months of after tax salary, I should have said 6 months of living expenses at a level you'd be comfortable living on for that time. That number is going to be very different for a lot of people.

I've known folks that made really good salaries that could go into super-low living expense mode when they weren't working, and other folks that didn't want to alter their standard of living when out of work. Both approaches are reasonable, but the amount you need to save is quite different. Hopefully that makes more sense.

 

[teg916]

That's the same thing I think. Except, the first year you buy CD's that are 1, 2, 3, 4 and 5 years. Each of the 2nd through 4th years you buy a 5 year CD with the money from the CD that matured that year. That way each year you buy one 5 year CD at whatever the interest rate is that year. Otherwise you're not getting much (if any) return on 80% to 20% of your money in years 1 - 4. Say you had $50,000, if my math is correct you'd earn $1,200 more buying the short term CD's the first year rather than waiting and buying a 5 year CD each year. You could also buy five $10,000 CD's but the risk to doing that is interest rates jump up (inflation?) and you're stuck with all your money at the lower rate.

Assuming you don't need the entire amount if you have five CD's you can limit your exposure to penalties by only withdrawing what you need. (Six months interest, at 2.5% on $50,000 would be $628 vs. $125 on $10,000) if that's significant or not.

OK, I gotcha. I misunderstood your first post, but that makes sense. If you went with that strategy, since the OP said he would get 1% in a high interest savings account, it would probably make the most sense to get a 3yr, 4yr, and 5yr CD, and put the rest into savings. Then buy another 5 year CD each year after that.

 

[phocup]

I'm looking up 5 year CD rates and they're showing to be 2.1% at the highest ( https://www.nerdwallet.com/rates/cds/best-cd-rates/ ).

Lowest mortgage rate in past few years is roughly 3.66% ( http://www.freddiemac.com/pmms/pmms30.htm ).

I'm no mathematician but I'm not seeing how you come out ahead putting $ into CD when you're paying off more of your mortgage + other debts.

Perhaps you are avoiding the pay off mortgage option because you're afraid of another R/E market drop turning your mortgage upside down ?

 

[afm199]

Put it in a savings account and forget it. It's emergency money.

 

[afm199]

Your situation is exactly when advisers like Clark Howard & moneyadvisor.com suggest "CD Laddering" so you don't have a long term CD with all of the funds tied up for a long period of time at a particular rate.

They suggest you take your money and split it into 5 even files and buy 1 of each of 1 yr, 2 yr, 3 yr, 4 yr, and 5 yr CDs.





http://www.clarkhoward.com/maximize-higher-interest-rates-long-term-cds

This I consider one of the more moronic practices around. It's a great idea in a market that actually pays some interest. We've been stuck at almost zero interest for years and may be for more years. It does NOT make sense to ladder CDs with stable or declining rates in this market. Unless you like making 1.5% and tying your money up for years.