Should I put $1000 into a CD (certificate of deposit)?

GameHat

Something I've been working on for the last few months is trying to build up an emergency cash fund. I've heard a lot of financial advice that says you should have 3-6 months worth of expenses in cash in case you lose your job or something; seems like good advice.

So when I've had a chance, I've put a $100 here and $200 there into my savings account. I've saved up about 1 month's worth of expenses (rent, utilities, gas, food) which isn't quite up to what it should be yet, but it's a start and I plan to continue.

Here's my question - my savings account effectively does not bear interest (actual APR is like 0.1%). So I'm keenly aware that me putting money into it is more or less the same as hiding it under the floorboards (ok, maybe it's a bit more secure in a bank. But still!)

I'm considering opening up a short term CD (7 months or 1 year). A quick look at interest rates tells me I could get about 4.5% APR in one of these.

Is a CD an appropriate place for "emergency" cash? First a couple of points:

• I don't expect to need the emergency fund within this time period
• I understand that there are penalties for withdrawl before maturity (though I need more research to quantify exactly what the penalties are)
• I am fully aware that better returns are to be had with other investments (stocks for example)
• For an emergency fund I can't tolerate short term losses; I need it to be there if I really need it.

Any yea/nays?

Thanatos

Your savings account is fucked. You need to switch banks.

A CD isn't really a wholly appropriate place for an emergency fund, as you can pull in similar interest rate from a decent savings account. You should check out ING's orange account, or the Washington Mutual online savings account (they give you a really good interest rate if you use their checking account with one of their online savings accounts).

Gdiguy

Just to extend that - your savings account is horrible, currently ING's online one is ~4.1% interest, HSBC's online one is 4.25%, and they're much much better for money that you want to be able to move (CD is for money you don't want to touch until the end of the term of the CD)

Quoth

A good alternative is a money market account, which is like a CD in terms of interest rates but which lets you take out cash more like a savings account.

http://money.howstuffworks.com/question724.htm

Atlus Parker

Gdiguy wrote: »

Just to extend that - your savings account is horrible, currently ING's online one is ~4.1% interest, HSBC's online one is 4.25%, and they're much much better for money that you want to be able to move (CD is for money you don't want to touch until the end of the term of the CD)

This.

I keep my savings in an online account with ING. Your bank is screwing you.

Steele

Quoth wrote: »

A good alternative is a money market account, which is like a CD in terms of interest rates but which lets you take out cash more like a savings account.

http://money.howstuffworks.com/question724.htm

i would do this, money market accounts are a safer way to make some good interest. however, anything that will net you a significant amount of interest at all on 1000 dollars will be very risky, you may be better off just hiding it under your mattress or something in these days.

Quoth

Savings accounts, CD's and money markets are extremely low risk. All of them, to my knowledge, are insured by the Fed for up to $100,000 or something like that. This came about after the bad ol' days when people would freak out and rush to banks and try to withdraw all their money, only the banks didn't have the money because they'd loaned it out to other people, and hysterics ensued. So now, just about everyone (except really rich people) are guaranteed to get whatever money they have in savings or CD's, with money markets being the slightly more risky bet. But do a little research and you'll quickly realize that these are by far the lowest risk investments you can find. And you won't have to worry about your mattress getting stolen.

The_Yeorinator

I'm an all-round investor, so I feel pretty qualified to help here.

You're right to think stocks are not good for an emergency fund; for an emergency fund you need reliability, freedom of withdrawl, and of course as much interest as you can get.

First off, ING's Electric Orange accounts are great...if you have a decent sum of money. Like most banks, they use tiered interest rates. To get the higher rates, you need higher amounts of money. At least that's how they functioned last time I looked at their site.

I recommend this one: http://www.igobanking.com/home/home

Same concept, better interest. They also have some attractive CD options.

I recommend CDs as a good way to build a real investment nestegg for a year or so while you study up on more advanced investing like stocks. This way you get some decent growth while you learn about markets, do some paper trading ('investing' in real stocks with pretend money, basically.... www.investopedia.com is good for that), and develop an investment strategy and philosophy that work for you.

GameHat

Just to clarify the situation;

Yes, it sounds like my bank is screwing me. It's a large national bank but my savings account doesn't lie; statements show me earning piss all. Literally like $0.32 in interest every month or so despite the fact that I have like $1600 in the account.

I'm not looking for stock investment options. For an emergency fund I just think they're no good.

I do have about $20k in index funds; it's all 401(k) though so that's really long term considering I'm only 26 years old.

Thanks for the better savings account advice; I'll look into these tomorrow.

Gdiguy

The_Yeorinator wrote: »

I'm an all-round investor, so I feel pretty qualified to help here.

You're right to think stocks are not good for an emergency fund; for an emergency fund you need reliability, freedom of withdrawl, and of course as much interest as you can get.

First off, ING's Electric Orange accounts are great...if you have a decent sum of money. Like most banks, they use tiered interest rates. To get the higher rates, you need higher amounts of money. At least that's how they functioned last time I looked at their site.

I recommend this one: http://www.igobanking.com/home/home

Same concept, better interest. They also have some attractive CD options.

I recommend CDs as a good way to build a real investment nestegg for a year or so while you study up on more advanced investing like stocks. This way you get some decent growth while you learn about markets, do some paper trading ('investing' in real stocks with pretend money, basically.... www.investopedia.com is good for that), and develop an investment strategy and philosophy that work for you.

Re: ING... um, no, there's no minimum for the rate?

High interest, no fees, no service charges, no kidding.
With an Orange Savings Account, you earn a variable 4.10% Annual Percentage Yield (effective 12/13/07) with a level of flexibility, freedom, and security you simply won't find at other banks. And because your account is FDIC insured, your account is secure.

No required minimum balances.
There is no minimum balance required to open your Orange Savings Account, and you don't have to keep a specific balance in your account to qualify for a high interest rate. No matter how much you have on deposit, the rate is still 4.10% APY.

I have an HSBC direct online one, so I can't comment about the ING one specifically other than it sounds good and I've only heard good things from people about it; I've been happy with HSBC (other than their lowering the rate from 5% last year down to 4.25% now, but since everyone is doing the same thing I don't think it's really a mark against them) ... Schwab (sp?) also has some sort of interest checking account that got like ~4% interest (also with no minimums I think, which seemed crazy to me)

If this is your primary savings money, then I personally would probably put it in just one of these savings accounts for now... though you're basically just balancing the risk of needing the money before the CD term is up against the .5% (ish) extra interest you'll make on a CD vs the 4.1-4.2ish% savings accounts, and that's a question you can answer for yourself.

*edit

I'm basing this on some looking at CD rates I did maybe 3 or 4 months ago, and they really were like 4.5-4.7% against the 4.3 my savings account was making at the time, so I didn't bother... if they've changed significantly recently then I guess it could be a bit different