Money Forward

This blog is about money and trying to keep my money from flying out the window.

Monday, November 06, 2006

Investing in CD's

If you have money that you don't need right away, but you would prefer not to risk losing any of it, a Certificate of Deposit (CD) may be the best choice. You could use it for your emergency fund, house downpayment, or other reserves that you don't plan on using in the near future.

The advantage of CDs compared to savings accounts is that you can generally get a higher yield. Right now you can find CDs that will return 5.65% in interest a year. The disadvantage, though, is that when you put your money in a CD it basically is unusable until the CD matures. This isn't true for all types of CDs, but it is for a traditional CD.

Although you may want to have an emergency fund and other funds more accessible, a CD should not be forgotten. It depends on your goals and assetts. For myself, I would prefer to have about 6 months to a year of income in my emergency fund.

To make this work using CDs, I would make a CD Ladder. Basically you set up several CDs so that one matures on a regular basis. An option for a year's worth of income in an emergency fund would be a CD Ladder where a CD matures every 3 months. Here's an example:
Say you have $20,000 in your emergency fund. You figure that will cover you for a year. To start a CD Ladder, deposit $5000 into 3 month, 6 month, 9 month, and 1 year CDs. Once each one matures, use the money to start a 1 year CD. After the first year, you will be getting a decent rate on your money, and $5000+ interest will be available to you every 3 months if you need it. The longer the period of maturity for the CD, usually the higher the interest. This may not be worth it though, and getting a CD over 5 years is generally a bad idea (just in case the interest goes up, you'll miss out). But several variations of this ladder will give you available money at set times, and a decent yield.

I will post more about CDs later.


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