All of us have money that we cannot afford to lose. The rest of our cash goes into the stock market. How much goes into each category is a personal choice. This article addresses the ‘cannot afford to lose’ money and offers some tips on how to invest it in CDs.
We all should keep some money in an emergency fund. Consider the recommendation to have three to six months living expenses on hand. If CDs are a part of your emergency fund, have enough cash to last until that next CD matures. The interest earned here might lose ground to inflation; just consider that as an ‘insurance premium’ that allows you to have instant access to cash when you really need it. Shop around for a Money Market Account for the emergency fund when checking CD rates.
The Internet is a great help when tracking current rates. Everyone from national banks to the local credit unions have web sites. Most list the rates on their site. I have noticed some patterns in my years of investing in CDs. Perhaps they will help you too.
The largest banks offer the worst rates. They have stockholders to pay and their rates reflect the additional cost. Recent failures of big banks indicate that ‘big’ does not always mean ‘safe’.
- Internet banks offer higher rates. There is a bit of hassle transferring funds to and from the bank; decide if the rate is worth it.
- Credit Unions offer the best rates. Check your local area. Many credit unions offer membership to people who live in a certain area or attend a certain church. Your employer may already provide a membership opportunity.
- Don’t overlook local savings banks or thrifts. A savings bank in my area is 110 years old and offers CD rates that match the credit unions.
Of these options, I have the best results with credit unions. They might not tell you this, but if you find a higher rate at another financial institution, most credit unions will match or exceed that rate. I maintain a spreadsheet with all the local rates and bring it with me when it is time to renew a CD. Show the higher rate to them and they will adjust theirs. After all, at a credit union YOU are the stockholder.
The CD term (length) requires a bit of thought. Many people use the CD ladder concept where each time a CD matures, it is replaced with a five year CD. When rates are low, I do not buy five year CDs. Currently, I can get 3.3 percent for five years or a 3.5 percent special rate for one year. So I’ll keep buying these specials until rates exceed five percent again. That’s the time to go long.
If someone says you won’t get rich this way, they are right. But remember- this is money you can’t afford to lose.
James Eubanks is a 54 year old retired computer systems administrator. He retired at 48 due to a disability. He receives a defined benefit pension and Social Security Disability so his goal is to make it grow as much as possible without loss. His wife is still working, her 401-K dropped “only” 20% during the 2008 debacle – not bad compared to others. Proving to Jim the value of some safe money. He says, “It should be anywhere except the market. With this safe money hidden away, we can invest other cash in the market and not worry about the short term losses”.
See Also: