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I’m at it again. I’ve compared the high-yield savings account to numerous things, and the certificate of deposit is the latest investment vehicle to catch my eye. I received an ad in the mail from Discover, who is currently touting some of the best CD rates out there (according to bankrate.com), at least starting at the 2-year mark. With the recent plummet of interest rates (e.g., my "high-yield" savings account with Apple Bank dropped from 5.27% last year to just over 2% last month, and then recovered slightly to 2.71% right now), I find the idea of a locked-in rate being more attractive.
Is this backwards thinking, however? I don’t want to fall into the same trap as novice investors, who sell-low and buy-high. The key question, of course, is what interest rates will do in the future. I can always shuffle my money around easily between high-yield savings accounts (I recently opened an account with OneUnited Bank), so I’m not concerned with which of them has the current high rate – just if a CD would be better.
As far as I can tell, the main contributing factors include:
- Investment amount – Let’s assume this is less than $25,000 (and thus not able to qualify for most rate incentives in this category).
- How long I’m able/willing to leave the money untouched – These funds represent my "6-month expenses" emergency fund, so they need to be relatively liquid. However, I don’t anticipate having to use them unless there’s an emergency (e.g., car wreck, lost job, etc.).
- How the market is expected to perform – I have no idea on this one, but there’s a lot of historical data.
As the likelihood of an emergency is small, should I stick the money the longest CD I can find and accept the penalty (which would be about 9 months simple interest on the amount withdrawn, if the terms are similar to Discover’s)? Or, should I choose the shortest CD length with an interest rate higher than currently available in savings (e.g., a 1.5 year CD with Discover is 3.71% APY vs 3.60% APY in savings at OneUnited)? Or, should I invest fractions of my emergency fund in CDs of varying lengths so as to have some of it maturing every six (or twelve) months?
Of course, if interest rates decide to skyrocket (and stay there), any CD I get right now would end up being a poor decision. So, what’s the best method to predict interest rates? (I considered plotting the daily history since 1990 and then analyzing situations similar to the present.)
What’s your approach and how would you see things if in my position?
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Couldn't Resist by VnutZ :: NR10 :: Show
My Ouija Board tells me: Z-C-A-D-M-5-YES
My Magic 8 Ball tells me: Outlook Hazy
George Washington tells me: Tails
My Chinese Fortune Cookie tells me: Opportunity will soon knock. When it does, answer the door!
So Seriously Though ... by VnutZ :: NR10 :: Show
My primordial instinct tells me that using the higher rate savings accounts right now is the better bet – or at most a short term CD. Why?
The Fed knows it can’t keep cutting the interest rate. That action was the quick fix bailout to the lending problems from banks. But they have known all along it would impact on the dollar and commodities market. With the cuts curtailed and future rate increases a way down the pipe, the interest rates offered by banks will begin to increase.
But they’ll also increase from a need to recover capital. The banks need YOUR money in their coffers so they can in turn reinvest it for themselves. And they’ll do it cheaply with CDs because of the time factor. Plus, investors are going to start shying away from volatile investment vehicles again … they already are but are currently tied up in commodities which they "feel" is safer and which became attractive thanks to rate cuts. Without those rate cuts, those investors need someplace to park their money while they look for the next sca … scheme.
White haired woman says.... by laneswife :: NR0 :: Show
1. If it is your emergency fund wouldn’t a CD of any length prevent access for a certain period of time?
2. Wouldn’t you get a severance package if you were fired from your job?
3. Don’t you have insurance to cover a car wreck?
4. Unusual medical bills might hurt you the most depending on how good your health insurance coverage is.
5. You can’t possibly and nor can the fed or the banks or anyone predict what interest rates will do and there are never any guarantees.
6. Don’t bother to plot the history because there are too many variables – for instance we had an oil crises that lead to a real estate disaster in Texas in 1988 but it did not hurt the other states like it did us. Historically the market always pays off in the long term, unless you just take too many ill-considered risks
7.I like your idea of investing in something with fractions – only as long as you have a regular replenishment into your liquid funds. (see 11. and 12.)
8. Historically I have liked to keep my emergency money in the a Money Market fund – although interest rates there are down from 4.11 to about what you said your savings rate is.
9. Compare the rates and know your own goals. )
10. There is plenty of literature available to assess your personal situation and get recommendations – the investment arm of your bank probably has an online program where you can input some basic figures and facts and get a recommendation shortly.
11. Do you have life insurance on yourself (as much as you can afford) and on Kari and Collin (at least for final expenses?)
12. Are you more than minimally insured on your home? Flood insurance too?
13. Lots of places to put your money – need to put them in the proper order.
14. You know how they always say to exercise "within your pain threshold"? Well, it is the same with money – stay comfortable with what you choose to do.
Love, Aunt Harriet
Volatile times by Anonymous :: NR0 :: Show
I think it is easy to get too focused on the interest rate. The difference between Discovery and Apple is about 2%. How much money per year are we actually talking about, a few hundred dollars? Nothing to sneeze at, but is it worth bothering with a CD?
I do believe that this is a very volatile time to tie your money down. Inflation could easily flare up. During the inflation of the late 70’s a friend said "the best thing you can do with your money is spend it".
Steve
Better be careful... by Anonymous :: NR0 :: Show
Great article! Thanks for sharing these info…however whatever investment we make, its better to test the waters first before taking a plunge. We are talking money after all..
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Why Tie It Up? by Anonymous :: NR0 :: Show
Why tie up funds when banks like venturebankdirect.com offer online savings accounts with very competitive interest rates?? 3.8% APY with no minimum balance and quick access. No long term commitments or penalties to access your funds when you need them. Personally, I’ll stay away from CD’s until they can are substantially better than a high interest savings account.
CD's Vs High Yield Savings by Anonymous :: NR0 :: Show
Emergency Funds are just that; "Emergency Fund". If you are trying to gain interest on your money its no longer emergency fund, its investing. You have to pay capital gains taxes on your interest depending on the amount invested. Take advantage of this down market and think about your future; cant make money without increasing risk. Buy solid stocks not mutual funds and buy a Put Option protection on the sector. ie XLF= Financial Sector ETF. That way if you lose money on the top side you gain alot on the bottom.