Beating Broke

Personal Finance from the Broke Perspective

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

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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?

Cost of Living Makes a Big Difference

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Where you live, and how much it costs to live there can make a huge difference in what your finances look like.  The differences in the cost of living between someplace like Seattle, or San Francisco and where I live, in North Dakota are stark.  Oftentimes, when you see someone using a calculator of some sort for your retirement “number” there are some assumptions that get made.  People simply assume that they are talking to people who have the same economic circumstances.  They also assume that a 20 year old male is going to need the same amount in their retirement account as the next 20 year old male.

Now, let me tell you something that will knock your socks off.  At least, it will if you live in one of those bigger cities.  Me and my family of 4 (+1 dog) do just fine on less than $70,000 a year.  We’re not extremists, living in a small trailer in a campground somewhere, eating only rice and beans all the time either.  Could we survive on less?  I know we could.  We have debt; student loans, car loans, medical bills, a mortgage, and your regular monthly utilities and such.  But, the cost of living here makes it not only doable, but affordable to live on that amount.

There are some things that cost about the same everywhere.  New and used cars, for instance.  A new pickup here still costs about the same $40,000 (depending on model and features, of course).  Other, more universal goods, like books, computers, and pretty much anything you can buy off the internet, still cost about the same.  But, for many of the other standard items, we’re a lot closer to the source.  A pound of hamburger is only about $3.50.  A pack of cigarettes is only about $4.50.  Compare that to the prices in someplace like New York, and you start to see the benefits.

Where the real difference is, is in the local goods.  Property being the big one.  I’ve compared a few times in different markets.  After the real estate crash a few years ago, prices have gotten a little better, but still aren’t all that close.  We own a 2+1 bed, 1 bath, house with no garage on a good sized city lot.  When we bought it, back in 2004, we paid a little over $46,000.  Some of you reading this likely drive cars that you paid more for.  The houses value has gone up some over the years, but the last time we had it valued, which was in 2011, it was worth $57,000.  I truly hope there aren’t too many of you driving cars that you paid more than that for, but I’d bet there’s one or two.  Comparable houses in some of the larger markets usually are priced closer to $250,000.  If I do the quick and dirty math on that, the mortgage payment would be $2,040 more in one of those larger markets.

I don’t have any real way to compare the utilities, but I have the suspicion that we pay less there too.  Our house is older (c. 1950), so it’s not the most energy efficient house out there, but we still only pay about $90 a  month for our electricity, and about $35-$40 for our natural gas a month.  Water, sewage and garbage are lumped together, and usually end up around $50 a month.

Another huge way that our cost of living is different is in travel costs.  I don’t mean vacations.  For most of that, we’re far enough from a major travel hub that it is usually a little more expensive.  What I’m talking about is commuting costs.  Last week, I slept through my alarm.  I’m supposed to be at work at 8.  I woke up at 7:55.  I skipped the shower, but I was able to get up at 7:55, get dressed, quickly help get the kids started getting dressed, and still made it to work at 8:15.  How many of you would just call in sick because you’d have missed the whole first half of the work day?  When I time my drive to work, it’s somewhere around 5-10 minutes depending on traffic.  And, when I talk about traffic, what I really mean is if there’s anyone coming when I have to make a turn onto a  street and I have to wait ’til they pass. I usually have to fill my 12 gallon tank with gas about once a month.  Sometimes I stretch it to 5 or 6 weeks.  And then there’s the savings on wear and tear on the vehicle.  I rarely put more than 12,000 miles on a car in a year.  That makes it really easy to keep a car for 10 or more years!

Now, I’m not telling you all of this just to boast about how cheaply I can live here.  Really, I just wanted to make you aware of the differences.  What you perceive as “normal” sometimes isn’t.  The same is true for me.  What is a good paying job here, would be considered a poorly paying job in a big city.  People who live in those big cities usually have a lot of amenities that come along with those extra costs.  Choices in movie theaters.  Professional sports teams.  Entertainment venues that can hold more than 30,000 or so people.  They pay for those extra amenities in extra costs that aren’t always monetary.  Crime rates, crowding, and more competition for jobs to name a few.

How does your cost of living compare?  How big is the city that you live in?  (for reference, the city I live in is about 15,000 people.)

img credit: afiler, on Flickr

How Higher Education is Ruining the Economy

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The last thing you probably expected, today, was a post about how higher education is ruining the economy. After all, aren’t personal-finance bloggers supposed to be all about advancing yourself, spending wisely, and earning all that you can? Perhaps, but I’m of the personal belief that one can still advance yourself, spend wisely, and earn all that your worth without having to go to college. Before I get off on a tangent let me explain just what it is that I mean. Higher education has its place. If you want to be an engineer, a doctor, social worker, or even a teacher, you’ll likely need to have a college degree. For those professions that require a college degree there simply isn’t any other way around it. But, that doesn’t mean you need to go to a college whose tuition costs exceed several years worth of the expected salary for the profession that you wish to have. After all, the idea is to learn a profession so that we can earn more money, not learn a profession so that we can spend more money.

Higher Student Loan Debt is Burdensome.

How does all that relate to the economy? The effects of the high cost of tuition are far-reaching. The added debt of college loans can create a cyclical debt treadmill. A recently graduated student may have a small window of time to get his or her affairs in order, but is quickly saddled with a student loan payment. Newly minted professional usually work extra hours to make extra money to pay off the large student loans they’ve accumulated. The combination of less free time with higher debt repayment figures creates a vacuum whereby the money earned never gets a chance to enter into the economy. And everyone knows that the quickest way for money to enter into the economy is through consumer spending.

Exaggerated Educational Requirements are Exaggerated.

But, the added debt isn’t the only reason that higher education is ruining the economy.  Heck, it isn’t even the student loan interest rates.  Our economy has always had an informal hierarchical system.  When I say that, I don’t mean that the people with the degrees got the better jobs, either.  Not so very long ago, the people who got the better jobs were the people who were best suited to it.  For many positions, that meant that the people getting the better jobs were the people with the most experience, and the most aptitude for the position.  Somewhere along the way, the people in charge of hiring decided that a higher education degree could replace some level of experience.  More and more companies decided that this was a good thing.  And now, many job openings require that you have a degree of some sort.  Real world experience in a position has been surpassed by classroom experience.  Entry level jobs that could just as easily be done excellently by a person with a high-school diploma are suddenly closed off to anyone without a degree.  Anyone that aspires to hold such a position is thereby required to attend college for a minimum of two years rather than spend those two years gaining experience and job skills for the position.  Worse, for the economy anyways, is that that person is then effectively taken out of the economy for at least two more years.  Instead of earning money, paying taxes, and contributing to the economy, that person is racking up the debt while taking so many credits that they can’t even afford the time to take on a part-time job.

How do we fix higher education?

College Fund © by Tax Credits

I think, first and foremost, we need to stop pretending that a degree is a “requirement”.  Stop pushing our children to attain a degree, and instead push them to get the minimal required training to attain the job/position that they desire.  Kids will be kids and they’ll do what they please, but they shouldn’t feel like their being pushed into a college education because their parents want them to get one.

We need to stop requiring degrees for positions that clearly don’t really need one.  In my particular field (IT for those curious among you), very little of what I learned in college has been applied in my work experience.  And yet, each of the positions I’ve had (with the exception of my most recent part-time job) has required a four year degree in the field.  Let me tell you, anyone with an aptitude for IT, and a willingness to learn on the job could have easily fulfilled all of the duties that I performed.  It’s a fact. How many other positions are there that are the same way?  Lots and lots, I’d wager.

From a strictly financial perspective, we have to do a better job of educating our children about how to go about getting a degree if that’s what they choose to do.  There are numerous tools that can help us out, in this internet age.  Our own government has a plethora of information to help, and there are plenty of other resources, like Big Future, that have lots of information too.

We also have to properly express what a fiscally responsible adult should do.  I can’t count the number of my fellow students (myself included) who took the maximum allowable student loans out, despite not needing that amount, so that they would have the extra funds available to do what they pleased with.  Yes, it’s some of the cheapest money you will ever borrow, but unless you’re planning on investing in a guaranteed rate account while you attend college, it’s still debt.  And every penny of it will make your financial life harder once you graduate.

Finally, we have to stop this idea that we are all entitled to a college education.  We aren’t.   It’s a privilege that we pay grandly for.  Just because you can spend $50,000 a year to get your library sciences degree, doesn’t mean you are entitled to, or should.

Do you have a degree?  Was it required for your position?  Should it have been?  How would you fix higher education?