Beating Broke Rules — Beating Broke

Beating Broke Rules: Certificate of Deposit

April 28, 2016 By Shane Ede 1 Comment

What is a Certificate of Deposit? Certificate of Deposit (commonly called CDs) are basically a savings account that pays a set rate over a set term. The rate tends to be higher than a normal savings account rate because the money is locked into the CD for a set term. If you choose to withdraw your money before the term ends, you pay a penalty. The penalty is usually a preset number of months interest on the CD. At the end of the term, you can renew for another term at another set rate or keep your money.

Rules: Certificate of Deposit — Safe and Stable Investments

CDs are a very stable investment. They are also a very liquid investment. As such, they make for rather poor returns on the long term and they carry a penalty for withdrawal before the “maturity”. However, there are several uses that can make them a valuable part of your financial portfolio.

6 and 12 month CDs can be a great place to keep your emergency fund. Chances are you won’t need the money, so you might as well invest it. The key here is that the CD is a safe, stable, and easily accessible form of investment. You’ll still get the higher interest rates that you would expect from a high-yield savings and, depending on the term length, sometimes better.

As you get older, CDs can play an important role in your retirement accounts as a small percentage of your portfolio. Again, the stability and reliability of the nature of CDs makes is the key. As you age, a growing portion of your retirement portfolio should be in stable cash investments. Many will recommend something like a money market account or a high yield savings, but CDs are in that same group. And with a retirement account, you can usually tie the money up a little longer and get better returns. Look for something in the 2-5 year range for maturity.

As I mentioned before, one of the major drawbacks to CDs is the early withdrawal penalty. In most cases (consult your CD paperwork) the penalty is 3 months interest. So, if you were to withdrawal the money after only three months, you would only be able to withdrawal the original amount. If you withdrawal the money at only one month, you would get less than the original amount. Anytime after 3 months and you get the original amount plus any interest above the three months penalty.

While the penalty can be bad if you need the money early in the term, if you need the money for an emergency, it can be overlooked pretty easily.

Beating Broke Rule: CDs can be an important part of your investment portfolio

Beating Broke Rules: Bonuses

December 8, 2010 By Shane Ede 11 Comments

Beating Broke Rule: Spend your Bonuses wisely.

Every year, many of us are lucky enough to receive some sort of bonus from our employer. (If you’re self employed, that’s bonus enough. 😉 ) And when we do, the inevitable question arises. What do I do with the money? And then, how to budget for it?

The simple answer is to spend it wisely. In a more complex answer, it depends on what your goals are for your financial life. Using your bonus to buy Christmas presents may make you feel good for a month or two, but will you feel guilty afterward? You’ll feel much better, in the long run, if you spend the money wisely towards your goals.

Here’s the downside to that, though. You’ll also feel guilty if you use it all for debt repayment. Each of you will have a different situation, but here’s how we usually use our bonus here in Beating Broke.

Consider taking 10% of the bonus and blowing it. Buy some presents. Take your family out to dinner and a movie. Whatever you want. Give yourself 10% in cash and free rein to do whatever you want with it. You’ll feel better when you do.

With the remaining, take a look at your situation. Do you have a purchase that you’ve been saving up for, or putting off until you could afford it? I’m not talking about those gifts, or the television upgrade, but things that you really need. Maybe some costco eyeglasses? For example, a portion of my bonus (if I get it) will go towards buying new tires for one of our cars and paying for a repair that one of them needs. It won’t take the whole bonus, but a good portion of it. And it will be extremely relieving to not have to come up with that money out of my normal paycheck. If the bonus doesn’t come, I’ll still have to pay for those things, but it might take a little longer to pay for them.

Maybe your situation doesn’t have a purchase like that that you need to pay for. But, maybe you’ve got some debt that it could help retire. What we don’t spend on tires and repairs, will likely go towards paying off a debt. It won’t pay off any of them all by itself, but it will cut the payoff by several months. And, while that doesn’t give me the same feeling that just blowing the money on stuff does, it will leave me feeling much better for a far longer time.

The bottom line is this. Think about how you spend your bonus and spend it wisely. You’ll feel much better for it.

photo credit: jypsygen

Advice for College Graduates

May 14, 2010 By Shane Ede 7 Comments

When I entered college, I had no debt. Well, I guess I had some as I’d already signed the papers, but hadn’t received the money, for the loans I was going to be using to partially finance my education. When I finally graduated, 7 and a half years later, I had mountains of the stuff. Nearly 30k in college loans, close to 10k in credit card debt, a car loan, and a mortgage.

For the high school graduates: If you learn nothing in college, learn to avoid debt. That single thing will make the rest of your life so much easier. It allows you to start ahead of every single one of your college peers, and will make it so much easier to achieve the goals that you want in life.

If you’re reading this, and you’re a college graduate that never got the above bit of advice, you’ve likely ended up like I did. Lots of debt. Here’s my advice to you (and roundabouts to my past self).

Learn how to budget. Creating and maintaining a budget opened my eyes to the ways that I was spending (and wasting) my money. Create a budget for yourself and stick to it.
Learn how to avoid debt. Very few of you will be able to completely avoid debt. Minimize it. Pretend it’s your leprous uncle. Instill an aversion to debt.
Learn the meaning of appreciation. If you’re going to add debt, only do so to buy something that you expect to appreciate. New furniture doesn’t count. Houses sorta count. Cars absolutely, positively, do not count.
Learn the value of shared costs. Just because you’re a big boy (or girl) now with a fancy diploma (with fancy calligraphy), does not mean that you’re above having a roommate. In fact, I would encourage it (unless you’re married, because that’s just a bit weird). It doesn’t even take a calculator to figure out that rent/2 is better than rent/1.
Learn the value of patience. Just because you can get a mortgage or a car loan, or whatever, does not mean you should. Statistically speaking, you’ll change jobs several times over the first 5 years of your career. Do you really want to be tied down to a house if you need to move to another city? Slow down and ease yourself into your adult life. It’s not all that it’s cracked up to be anyways.
Learn the word Retirement. Sure, your all excited about your newly earned earning potential and your fancy new career, but, if you’re like every other person on the planet, you’ll want to retire at some point. Start saving now to make that dream come true later.
Remember to have fun. Just because you’re all grown up and joining the “real world” doesn’t mean you can’t still have fun. Your hobbies and activities are what make the “real world” worthwhile.
Wear sunscreen. None of you will get this reference as you were probably 8 at the time. The rest us do and it’s not that important. (in case you’re curious: http://en.wikipedia.org/wiki/Wear_Sunscreen)

The preceding is, by no means, an exhaustive list. In fact, it can’t even really be considered a quick and dirty list. It is, merely, a list of a few things that I have come to think of as some tenets for post college life. Some, I have learned, others I wish I had.

Congratulations on your graduation, and best wishes as you join the rest of us in the real world.