Savings (4%) vs CD (4.6%) - which makes sense?

[jzunic]

We have about $60K in savings. We want to keep $20K in a savings account as our emergency fund. That leaves about $40K to play with. The money is currently in our ING account, but we just opened up an Emigrant Direct account to take advantage of the 4% APY, and we'll move at least $20K over to the ED account.

We've also been looking at 12-month CDs, with rates around 4.6%. We'd be comfortable putting about $20K into a 12-month CD, as we don't anticipate any need for the money over the next year. However, since the interest rates are rising, we're concerned that our money will be locked in the 12-month CD, and the 4.6% will become less and less attractive as rates keep rising.

Does it make sense to lock money up in a CD when rates are rising, and the interest rate in a savings account is almost as good?

Thanks for any advice!

[jmjj215]

It sounds to me like you answered your own question:

since the interest rates are rising, we're concerned that our money will be locked in the 12-month CD, and the 4.6% will become less and less attractive as rates keep rising.

If you're going to worry about it, stress about it, be bugged by it, talk about it too much, etc. I'd just sock it in ED and be comfortable knowing I had money-mobility if I saw an attractive offer.

[ken1706]

Keeping it in ED is probably not a bad decision. So far this year, ED has raised its savings account rate from 3% to 4%. If that continues, ED could be 5% by this time next year. So that would roughly equal a 4.5% 1-year CD today.

You may also want to consider some shorter term CDs. Corus Bank now has 6-month CDs paying 4.35%. Also State Farm Bank has a special 3-month CD paying 4.25%. World Savings Bank currently has the best short-term CD (5-month 4.65%). It's only been advertised to specific customers, but they will honor it if you mention the CD when you call.

[jzunic]

The World Savings 5-month CD looks great - that may be a better way for us to go. Thanks for letting me know about it... With some searching, I also found that Affinity Bank has the same offer available.

Thanks again for the advice!

[ken1706]

Yup, I just noticed the Affinity Bank CD also. Unlike World Savings, it is being advertised on their webpage. Here's the link:
http://www.affinitybank.com/pb/rates.asp

[genchan]

If you don't need the money for a year to 15 months, you might want to consider i bonds. They're paying 6.73% for the next 6 months, but there are restrictions you need to know.

[ken1706]

Yes, I Bonds are a good alternative to CDs. But it's important to remember that the 6.73% is only for the next 6-months. The 6-months after that will depend on the new rates issued next May. If inflation comes back down to a reasonable level, the I Bonds rate may be much lower.

Here's the link to the Treasury I Bond page:
https://www.treasurydirect.gov/indiv...res_ibonds.htm

[PennyPincher]

Aside from keeping your money with a bank, have you considered a real estate investment? With $40,000 to play with, you could buy a $200,000 condo/home (assuming 20% down.)

Then you can rent it out, and put any excess into your Emigrant account. Just a thought ~ I bought a place for a rental, and I love it. The tax write offs are wonderful, and I have a small steady stream of income. PLUS...the place has gone up over $75,000 in 2 years! I bought a new place so that the upkeep was minimal, if anything.

I'm very pleased w/my Emigrant account though - and ING. These are safe places to put your money, but I try to remind myself that they turn around and invest my money to make more for themselves. So...should I try to invest it and make more without using them as a middle man? (ING buys up a TON of real estate...how else could they afford to pay 3.4% and 4%?)

Good luck.

[jzunic]

Unfortunately, real estate isn't an option for us. We don't even own a home yet, but we live in southern California, where home prices are just outrageous. We don't know how much longer we'll be living here, so we don't feel comfortable buying right now - with the prices levelling off, we aren't sure we could ride out a drop in prices...

So while we wait until we can buy a home, we want to get the most for our money - that's why we're looking at CDs right now.

Thanks for the advice, though.

[jmjj215]

Originally Posted by PennyPincher

Aside from keeping your money with a bank, have you considered a real estate investment? With $40,000 to play with, you could buy a $200,000 condo/home (assuming 20% down.)

Then you can rent it out, and put any excess into your Emigrant account. Just a thought ~ I bought a place for a rental, and I love it. The tax write offs are wonderful, and I have a small steady stream of income. PLUS...the place has gone up over $75,000 in 2 years! I bought a new place so that the upkeep was minimal, if anything.

I'm very pleased w/my Emigrant account though - and ING. These are safe places to put your money, but I try to remind myself that they turn around and invest my money to make more for themselves. So...should I try to invest it and make more without using them as a middle man? (ING buys up a TON of real estate...how else could they afford to pay 3.4% and 4%?)

Good luck.

do you pay a management company, or do you mange it yourself?

[PennyPincher]

I manage it myself. I was nervous at first (I'm only 30) but I saw my parents build a decent income that way. (and they were more resilient when a crisis came about - such as 9/11) It is a great condo unit with a 2-car garage and plenty of storage. I can clear over $300/month - so it is very worthwhile. Since it is only 2 years old, I don't have repair issues that I could have elsewhere that would eat into my profit.

I've also lucked out with GREAT tenants. They just renewed at $100 increase~

The management companies I've looked at typically charge 10% of the rent. I may do that if I move out of state. With my profit now over $400/month, I could still afford to pay $160/month to an agency - but I'd prefer not to.

If only my primary residence weren't so expensive...