Are Certificates of Deposit (CDs) Still a Valuable Tool?

Read just about any personal finance article on saving and you’re likely to also read something about certificates of deposit.  Heck, I’ve covered what a certificate of deposit is, how to create a CD ladder, and mentioned CDs several other times.  But, as much of a mainstay as they are in the typical savings mantras, are they still a valuable tool for savings?

Recent economic changes have certainly not been kind to many of us, and our methods of savings haven’t been treated well either.  The interest rates on savings accounts is terrible.  My local credit union doesn’t pay enough to even make it worth my while.  And online savings banks that used to be the poster children of high-yield accounts are paying less than 1%.  It wasn’t that long ago that a 5 year CD would have been paying 6-7%.  Now?  Closer to 1%, even at the online banks.  My local credit union is paying 0.25% on a 12-month.  (they apparently either don’t offer  5 year, or they don’t post the rates for them)

There are still some good rates out there though, if you take the time to look.  Well, better rates than what some are offering.  In the current economic situation, you can’t ask for much.  Click here to read more information on one such certificate of deposit.  But, even with rates that are closer to 2%, are they worth your time?  If we assume that the rate of inflation is somewhere around 3%, (I think it’s higher) aren’t you losing money by only earning 2% on the CD?  Yes and no.  If the money would just be sitting around in a savings account and making little to no interest, the CD at near 2% would be better than nothing.  Literally.

So, back to the question at hand.  Are CDs still a valuable tool for savers?  The answer, again, is yes and no.  No, because they aren’t the best tool.  There are other ways for you to make your money work for you.  They all make better returns than you would with a CD.  However, they all carry some caveat that you have to know about if you’re going to use them.  In many cases, the risk is higher.  Investing the money in stocks, or in something like Lending Club can get you much higher returns, but the risk is also much higher.  Investing the money into real estate, while a good passive income idea, is also a higher risk investment, plus the money is locked away in a non-fluid investment.  Treasury bonds can have higher returns, but often only at the cost of tying the money up for a long time.

If there are so many higher yielding investments to make, why are CDs still sometimes a valuable tool for savers?  There’s two really good reasons.  The first is that the money is not tied up for very long.  Even if you purchase a 5 year CD, you can still cash the CD out and only pay a small fee.  That fee is usually something like 3 months of interest.  As long as you’ve held the CD 3 or more months before cashing it out, you don’t lose any money.  So, the money remains pretty fluid.  The second reason is that a CD is an ultra secure investment.  That’s also why the rates are lower.  A CD is what is called a secured investment.  You deposit (hence it’s name, certificate of deposit) an amount of money into the account, and agree to leave it there for a certain period of time (the term of the CD) in exchange for a guaranteed return rate.  There’s very little risk at all.  Even if the bank you open the CD at goes bankrupt, you’ll be covered by the FDIC or NCUA insurance.

While I wouldn’t suggest putting a huge chunk of your retirement into CDs, (unless you’re nearing retirement) I would suggest putting something like your emergency savings into them.  They’re also a good tool for squeezing a bit more interest out of a new car savings, or a similar savings that has a mid-range use date. Just pick a CD with a term shorter than the length of time you’ll be saving up to avoid any extra penalties.

CDs don’t offer the greatest rates, that is for sure.  But, their lack of risk, and higher fluidity make them great for short and mid range savings.  And that makes them a mostly valuable tool for savers.  You just have to know where and when to use them.  Just like any other tool.

Do you agree?  What savings would you use a CD for?

SwagBucks Offers and Codes Galore!

As you know, I’m a big fan of SwagBucks.  For me, it’s an easy way to accumulate points for doing things that I already do (search and coupons) and cash those points in for gift cards to places, like Amazon, where I shop regularly.  In fact, I just used my latest $5 Amazon card from SwagBucks to help pay for a new heating element for our clothes dryer.  (Stay tuned for a post on that once I’ve replaced it)

Today though, I’ve got a couple of special offers from SB as well as a super special sign up code that you can use to jump start your SwagBucks collection!

First, if you aren’t already a member of SwagBucks, you can use the following code to sign up and receive an extra 70 SB.  Add that to the 30 you get normally for signing up, and you get a total of 100 SB credited to your account when you sign up.  It only takes 450-500 to redeem for a $5 gift card, so you’ll be a good part of the way there.  Here’s the code:

BEATBROKESB

Use it when you sign up for SwagBucks.

Now, for the special SwagBucks offers.

The special offers are available to new and current users of SB, so anyone can collect on them.  Sign up with a new account, use the code above, then take advantage of all four special offers and you’ll already have earned your first $5 gift card.  Pretty sweet deal for about 15 minutes of work.

Please note that these are special offers, so I can’t guarantee how long they’ll be available.  The sign up code is only good through 11/21/2012.

 

3 Ways Young Homeowners Can Save $3745 (at least) Each Year

If you recently bought your first home let me congratulate you. This is possibly the very best time to buy real estate that you’ll ever see in your lifetime. You made a smart move. And because you are a smart real estate investor, I know you’ll be interested in taking advantage of the following 3 ways young homeowners can save even more “moolah”.

1. Home Warranty

I owned a home warranty program for years and it was a waste of money. Of course it felt great not to have to worry about running into major unexpected expenses, but the cost just didn’t justify it. First of all, you are stuck with any repair person the home protection company sends out. Next, the deductible you have to pay is often pretty close to the amount you’d have to pay to a contractor of your own choosing. Last, when you do have a major repair, you are stuck (again) with whoever the company sends out unless you are willing to go through a great deal of red tape.

You’re always responsible for upgrades, code changes and any problems associated with misuse or poor maintenance. I cancelled my home protection plan several years ago and it turned out to be a fantastic decision. If you follow my lead on this, you’ll save at least $600 a year.

2. Life Insurance

If you are a young homeowner you might have a young family or plan on having one. As a result, you definitely need life insurance. But when it comes to term life vs. whole life – play it smart. Term life is your best friend. It’s cheap and it does the job. It’s true that at some point (20 or 30 years down the road) your term insurance will expire. But by that time, you may not need life insurance anyway. Term life is so much cheaper than whole life that you can take that savings and invest it. This way probably you’ll have much more than the whole life promises.

One of the biggest problems with whole life (and I feel it’s criminal) is that agents sell you the whole life you can afford because it pays them a whole lot more commission. (Maybe that’s why they call it “whole” life.) And because it buys a great deal less insurance than term, people end up dangerously under-insured. You could save several thousands of dollars each year and have better coverage just by having term instead of whole life insurance. Look into this ASAP.

3. Good Credit Score

Because you are a young homeowner, you’ll be using your credit for a very long time. And you might have to lean on that plastic a lot right now to pay for all that new furniture and appliances. If you able to get even a slightly better credit score, you might end up savings a bundle every month. That’s because a higher credit score will help you get lower interest rates on credit cards and mortgages.

Find out what your score is and make sure there are no errors. If there are mistakes, fix them. You can easily do most of this without paying a cent. You can even get your credit score for free and sign up for services that provide updates whenever there is a change to your rating. This has helped me a great deal.

As a young homeowner you might be facing some pretty hefty expenses and that can be daunting. Take these 3 steps. Dump the home protection plan. Get rid of your whole life insurance and buy term instead. Finally make sure your credit score is as high as possible.

Will you save $3745? I don’t know. You could save a lot more. You’ll never know until you start taking action.

What are the biggest expenses you face as a young homeowner? What have you done to reduce those costs?

This was a guest post written by Neal Frankle. He is a Certified Financial Planner ® and owns Wealth Pilgrim – a great personal finance blog. He writes extensively about ways to help people make smart financial decisions. One of his most in-depth posts was his review of CIT Bank.