Rolling CD (Certificate of Deposit)
My friend Clinton Middleton wanted to follow-up on my saving money video, suggesting the Rolling CD:
I admit, I am one to dip into money if I need to, this is not always a good idea. A CD helps discourage doing this and provides a better money return with decent interest rates. But what if you really do need to have some liquid cash for a big emergency, but still want to enjoy the CD rates? A rolling CD is for you!
It works like this: Let’s say you have a chunk of 3000 dollars, and you are thinking about a CD. Don’t put the entire amount in at one time, it will be a whole year before you can touch it. Instead, put in 500 (usually the minimum amount for a CD). Then 60 days later, buy another CD for 500. In a year’s time you will have invested your 3000, and if you get in a pinch, you have 500 plus interest coming your way every other month.
If you don’t need the money, all the better, just let it roll over into a new year and enjoy the compounded interest. This should be the rock bottom for all your investments, a good solid base of cash, that you can get to if you need, without incurring big fees like those associated with borrowing from your 401K, etc.
Of course, if before you do the rolling CD, pay off those high interest credit accounts, with possible exceptions of you student loans, mortgage and maybe a low rate car loan.
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3 Comments
RaVeN DiZzle
February 6th, 2008
at 6:14am
Nice article, something my boss would like to read.
Dave Barnes
February 6th, 2008
at 9:08am
Or, you could put the $3K into a high-growth mutual fund and then line up a Home Equity Line of Credit (HELOC) for $20K (just in case).
Your $3K would grow at 7% per annum on average and the HELOC would only cost you $50/year to keep.
After 10 years the CD: 1.035^10 x 3000 = $4232
After 10 the mutual fund + HELOC: (1.07^10 x 3000) - (10 x 50) = $5400
RussH
February 8th, 2008
at 9:10pm
All in all, not a bad idea. However, keep some NASTY finacial facts in mind.
- Good luck with 7% return given the impending recession and continuing market downturn. You will need at least 10 years to see this kind of return. That is completely counter to the idea of having a CD Ladder to keep CASH at hand for current needs.
- The FED will continue to kill your CD rates of return. 1% - 2% is where it will be shortly if they keep on cutting rates. Your not going to get better than 3.5% on CDs today
- HELOC better be fixed rate. Better allow partial withdrawls. Better allow prepayments without penalty.
- Best HELOC rates are about 5-6% so you have to make that as a minimum just to break even.
- Watch those STUDENT LOANS. You are screwed forever with them. No escape, no bankrupcy out, no matter HOW BAD things may get for you. Avoid STUDENT LOANS at all cost and pay them off FIRST.
This whole idea is DUMB
Grins
RussH