Certificate of Deposit

Archive for December, 2006

Question: What are my best options to start investing or saving money?

Some savings are short term for Grad School and some are long term towards a house or family, etc. Most of my money now is in the bank and a GMAC savings account, but I know I can receive a larger return elsewhere. I plan to keep some savings there for emergencies. I have a job but not a pension plan so I do not want to look into retirement savings yet.

I definitely want to invest some in stocks now that the market is down. What are the current situations for bonds, Money Market accounts, and CDs? I have read about all these and mutual funds but I have no idea what the best option is. I do not want to pay a financial advisor if I can avoid it, but I will.

Any thoughts? I have a couple thousand of disposable income now and can save about $500 per month. I want a mix of safe and high yield investments.

Thanks!

Answer: Standard investment advice is that you should invest in a diversified mix of stocks, bonds, and Money Market funds. If you are like most people you will invest part of your money aggressively in stocks, and part conservatively in Money Market funds and bond funds. However, some young people will go all stocks, and some very conservative people will go all money markets. The links below have on-line questionnaires which will give you an idea of how to do “Asset Allocation,” determining how much to put in each type of investment.

You want to buy a diversified portfolio of stocks as individual stocks are too risky. Highly knowledgeable people can buy a properly balanced portfolio, but most folks have a difficult time balancing things on their own. They will misbalance their portfolio by buying all small stocks or all growth stocks, or some other misbalanced assortment of stocks. Back in 2000, Some people bought all Internet stocks; they got burnt when they all crashed together. You have to diversify across industries. Unless you know what you are doing, it is best to buy mutual funds that will diversify for you. Buy no-load, low cost funds. Mutual funds should have expense ratios of less than 0.5%.

If your company does not offer a retirement program, you can still save money in a retirement IRA. The money grows tax-free. If you have children, you may want to consider a 529 plan or other college savings plan that grows tax free.

I like index funds. Because of their broad diversification, you are less likely to have a dramatic drop in value. They also have the lowest expenses. For stock funds, I would suggest putting ~70-80% of your money in the Vanguard Total Stock Market Index Fund. and ~20-30% in a foreign stock index fund. However, there are many different opinions out there on what the best mutual funds are. Read the links below and form your own opinion.

If you have high-interest debt, like credit cards, it is best to pay this off first before trying most of the investment ideas above. You should also have 3-6 months of salary saved up as an emergency fund in a bank or Money Market fund before trying more risky investments.

I will warn you that there is a tremendous amount of stock investing books and websites that teach stock investing strategies that don’t work. Particularly bad are people that teach “technical analysis” systems that sound impressive, but don’t work.

Believing advice you get on Yahoo answers can be risky, so read these websites for further information. If you find it too confusing, contact a professional financial advisor. They will charge you significant commissions, however.

Money Management & Personal Finance : What Is a High-Yield Savings Account?

Question: How to calculate penalty for early withdrawal of Certificate Of Deposit?

I haven’t invested in a cd for many years. I am playing around with figures and am considering investing..let’s say in a $1,000 cd at my neighborhood credit union. The APR is 5.13% and the APY is 5.25%

Question # (1) The paperwork states:
“If funds are withdrawn prior to maturity, a penalty will be imposed as follows: The dividend for the last 120 days on terms of 12 months or greater; 60 days for dividends for terms less than 12 months will be forfeited whether or not earned. Penalty will be calculated on the original certificate principal amount. Principal may be reduced by amount needed to satisfy penalty.” How would I calculate the amount I would lose if I withdrew after, say, 6 months ? I’m just trying to get estimate of what I might possibly lose if, a few months into the future I want to withdraw.

Question (2) Would early withdrawal hurt my FICO score/Credit Rating? Would it hurt my “good reputation” with my credit union?

Answer: Credit unions use some specialized terminology, “dividends” is commonly known as “interest”.

The penalty is based on the term (maturity) of the CD. For CDs with a twelve month, or longer, term the penalty is 120 days interest. For CDs under twelve months, the penalty is 60 days interest. This penalty may reduce the principal on deposit.

I recommend asking how they pay interest. Usually the depositor gets all CD interest at maturity. Let’s say you open a five year CD, then for whatever reason withdraw the money after six months. The penalty is 120 days interest because the term is more that twelve months. Does the credit union pay you six months of interest before deducting the penalty? I believe most do not pay the interest but some do. I think either way is legal as long as the institution discloses properly.

If you are considering withdrawing early, I recommend against a CD. You might want to look into the specifics of when you might need the money, additional interest income versus potential penalty etc.

Not 100% sure, but I do not think early withdrawal hurts your FICO score. I do not think it would hurt your reputation with the credit union either.

CD Early Withdrawals , Penalties and Maturity Options