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June 30, 2008 2:45 PM   Subscribe

My 13-month CD is just about up, and the current intrest rates are TERRIBLE! How should I invest 10k?

I'm currently getting 5.25% on my CD which is up in two weeks. I'm young and carefree with no major responsibilities (ie no debt, no family to take care of, and my biggest expense is rent) and already max out the matching contributions on my 401K. Ideally, I would like to be able to get to this money in no longer than 3 years--bonus points if I can get to it in an emergency. Safe is probably better.

I know almost nothing about investing... what should I do? Thanks!
posted by veryhappyheidi to Work & Money (25 answers total) 17 users marked this as a favorite
 
If you’re calling 5.5% terrible, well… I’d be happy to be getting 5.5% on my money right now. Are you currently at 5.5%, but future CDs are terrible in comparison?

I don't know that it's the best option, but one option would be a high yield online savings account like those of HSBC or ING Direct... they're around 3.5% now I believe.. maybe 3.75%... I'm sure there's higher yields out there, but the nice thing about the online savings (I have an HSBC one) is I can add/remove money whenever I want without penalty, and it's still a halfway decent savings rate.

I'll be reading this thread myself though, for better ideas...
posted by twiggy at 3:14 PM on June 30, 2008


Just pick a shorter-term CD if you're betting that the interest rates will be back up by the time it rolls over.
posted by SpecialK at 3:16 PM on June 30, 2008


Recent and Relevant

CD's are ugly right now. If you're in it for the long term then it seems like a very good time to get be getting into the stock market since its coming off of a world class hammering last week.

I said it in the linked thread but if you don't want to have to babysit your investment, index funds are the way to go.
posted by bitdamaged at 3:27 PM on June 30, 2008


I suspect she's happy with her 5.5%, but can't get it any more.

If you don't want the risk of the market, I'd just stash it in a high-yield savings account and wait for things to improve, then dunk it into a CD once that happens.
posted by Tomorrowful at 3:37 PM on June 30, 2008


I obviously meant 5.25%.
posted by Tomorrowful at 3:37 PM on June 30, 2008


I think if you want safe and available in an emergency, you should put it in a high interest savings account. These are getting around 3-4% right now. I would not put my money in a CD right now, since short term ones pay less than that, and long term ones tie up your money at rates that might seem low next year.
posted by justkevin at 3:41 PM on June 30, 2008


Hi, sorry about the confusion. I'm currently at 5.25% and would love to get something along those lines again.
posted by veryhappyheidi at 4:13 PM on June 30, 2008


discoverbank.com has a near 5% on a 60mo. Three weeks ago I saw 5.0% on 36mo at national city bank. If you think that rates are going up (everyone else does) then park it at 4.3% for a year or 4.0% for 6 mo and cope. You're also free to get into non-banking products, but we're living in interesting times, and there are few options that don't exposure you to a lot of variability. Remember, if it's "emergency money" you have to ladder it so that it becomes available on a regular basis!
posted by a robot made out of meat at 4:23 PM on June 30, 2008 [1 favorite]


high yield online savings account

Our EmigrantDirect account is down from >5% when we opened it 15 months ago to 2.75% now. It looks like HSBC is advertising 3.5%, but only through August. Things are tough all over...
posted by staggernation at 4:56 PM on June 30, 2008


Have you thought of putting in an annuity? There are some good rates (5.2% example) (I see links but they are mainly secondary bank offers) on even a $10,000 annuity and I am sure you can grab on for less than 10 years if you look around. The other thing you can do is find an annuity through a charity that you support, where they'll get some of the interest that you can presumably write off.
posted by parmanparman at 6:23 PM on June 30, 2008


If I had $10k to invest short term right now, I'd buy TIPS -- Treasury Inflation-Protected Securities. If inflation goes up, their value goes up. It's not a sure thing, but it's a good way to hedge against inflation, which could reduce the buying power of that $10k significantly over the next few years, depending on how bad food and energy prices get. Vanguard also has a low-fee TIPS Fund if that's more your style.
posted by junkbox at 7:08 PM on June 30, 2008 [1 favorite]


Q> Why, other than liquidity should I buy into the Vanguard fund rather than buy TIPS from the Treasury? In other words, why buy one over the other. I too have a big CD that is coming on renewal right now, and I was looking into TIPS.
Thanks.
posted by Gungho at 7:29 PM on June 30, 2008


Three weeks ago I saw 5.0% on 36mo at national city bank.

That might be because National City (stock ticker symbol: NCC) is about to go under, probably by early next year, so they're desperately trying to raise cash by offering ridiculous deals. I wouldn't put my money there if I were you, unless you have a lot of faith in the speed and efficacy of the scrambling-to-hire-new-auditors FDIC.

Remember, folks: as has been mentioned before (hello, August, 2007, can I get a what-what on those proven-to-be-crappy banks I listed?!), if you see a bank offering really high CD rates, out of whack with most other banks, it's probably because they really need your money. Stick with a solid local bank that gets good ratings from Bankrate.com, and do not go over FDIC limits at any one bank, even if you have multiple accounts at that bank.

So sorry, veryhappyheidi, looks like it's 3% time for your money. But fear not! The Federal Reserve is probably going to have to start raising interest rates really, really soon -- probably not the next meeting, but then the one after that. The European Central Bank is probably going to start raising this week, in fact. So rates will head back up before you know it. I would stick the money in a short term CD in the meantime, and grin and bear it. Beats losing money in the stock market, at any rate.
posted by Asparagirl at 7:44 PM on June 30, 2008


You can get greater than 3% but you have to take on more risk. I have most of my savings in a "high interest" savings account (down to about 3.3% now), but I've been playing with some money in the market and doing alright (12% or so, but only on the smallish amount I was willing to risk). I've been blowing away the market averages just by using common sense here and there.
posted by knave at 8:00 PM on June 30, 2008


unless you have a lot of faith in the speed and efficacy of the scrambling-to-hire-new-auditors FDIC.

When NetBank went under, depositors lost access to their money for an entire weekend.

Back to the topic at hand: some of the municipal bond closed-end funds have quite nice yields right now. Yields are free from Federal income tax too, making them even sweeter. Of course, the value of the security itself can go up or down as well, but if it goes down you can sell, take a short-term capital loss (offsetting up to $3,000 of regular income), put the money into a money market for a month, and then buy the exact same fund again.
posted by kindall at 8:57 PM on June 30, 2008


When NetBank went under, depositors lost access to their money for an entire weekend.

Yes, but some of the banks that are now considered to be in trouble are at least an order of magnitude bigger than NetBank. Some of the names being mentioned are bigger than anything the FDIC has ever had to deal with before, and that includes their takeover of Continental Illinois in the early 1980's and the S&L mess in the late 1980's.

But we're derailing here. :-)
posted by Asparagirl at 10:19 PM on June 30, 2008


Commodities are hot right now. ;-)
posted by Mr. Gunn at 1:03 AM on July 1, 2008


kindall -- "Back to the topic at hand: some of the municipal bond closed-end funds have quite nice yields right now. Yields are free from Federal income tax too, making them even sweeter. Of course, the value of the security itself can go up or down as well, but if it goes down you can sell, take a short-term capital loss (offsetting up to $3,000 of regular income), put the money into a money market for a month, and then buy the exact same fund again."

Wait a second - OP is clearly looking for cash or cash equivalent investments, and seeking to maximise yield in that asset class.

Munis are completely different, and even if one were to purchase a Muni CEF at a discount (the only time one should purchase any such fund) that entire asset class is very, very volatile right now. A lot of the volatility is driven by a recent Supreme Court case that we all were carefully watching (Kentucky vs. Davis) but regardless, the time to purchase Munis was a couple of months ago when I posted that comment. Retail money was dumping Munis big time, and there were some eye popping yields out there just for the picking. Once identified, that opp didn't last long.

I haven't run the numbers recently as I've finished my Muni trades a while ago, but it seems that entire asset class is yielding a little under 7% and most CEFs are now trading at premiums to NAV - in some cases as high as 20%! This is clearly NOT a good time to establish a new position.

Also, looking at past performance (history is our guide in all things related to the markets) - you really don't want to be holding Munis during a recession. Not unless you purchased at the kind of discount available last March when I posted that comment.

No I'm afraid for OP it's CDs all the way, and short term as well. And don't take a position based on talk about The Fed raising rates anytime soon (even the professionals get that wrong a lot of the time btw), but instead make your decision based on maturity and relative interest rates.

Looking at past credit cycles we know when The Fed finally does start to hike the increases will come a lot faster than most folks presently expect.
posted by Mutant at 3:11 AM on July 1, 2008 [1 favorite]


Why, other than liquidity should I buy into the Vanguard fund rather than buy TIPS from the Treasury? In other words, why buy one over the other. I too have a big CD that is coming on renewal right now, and I was looking into TIPS.

Aside from liquidity, you don't have a fixed rate. With a fixed-rate investment you have a guarantee of income even if interest rates go down; with TIPS your rate is variable. Since the Treasury determines yields at auction, and lots of people want to hedge against inflation right now, it's a pretty hot investment, which pushes down the yield that you get.

Basically, the reason not to get one is that everyone else wants one right now. If you think that everyone is probably right, that's great. If you think that everyone tends to overreact a bit and have pushed the yield too low, don't get them. In October last year, the rate on a 9mo TIPS was 2.625%. Two months ago a 60mo was 0.625%.
posted by a robot made out of meat at 5:15 AM on July 1, 2008


I say try a local credit union. I use bethpage federal credit union here (used to be part of grumman) and they have money market savings accounts at 3.01 percent intrest. 12 month CD's are at 3.25 percent and 60 month are at 4.25 percent.

This bank will not go under. They are actually receiving tons of busines and give better rates then normal banks.

So my advice is try a local credit union.
posted by majortom1981 at 5:36 AM on July 1, 2008


Yes, I have a significant confidence in FDIC and the efforts of regulators and congress to avoid a consumer banking meltdown. My understanding is that if Indymac, National City, Countrywide, et al with bad mortgage exposure keel over others will start to domino and Very Bad Things will happen across the board. From the top there is an overwhelming interest in making sure that FDIC works, otherwise there would be a national banking panic.
posted by a robot made out of meat at 8:17 AM on July 1, 2008


You might want to look into Prosper, where you essentially buy shares in personal loans. If you're only looking to make in the 5-8% range, you can restrict all of your loans to people with high credit ratings taking out smaller loans. Of course there is some risk involved but it's probably no more risky than the stock market, and from a legal standpoint the borrowers are expected to pay you back with interest. You could put half of your money in a low interest CD and the other half in Prosper. Loans are for exactly 3 years, although some borrowers pay their loans back more quickly.
posted by Deathalicious at 2:58 PM on July 1, 2008


Seconding a robot made out of meat. You do not want to buy TIPS right now. If you owned them before everyone wanted them, that would be one thing, but now you should hold off. Also, you want to hold TIPS or a TIPS fund in a tax-free account such as an IRA, or you will owe tax every year.

You could think about GMAC Demand Notes, which are paying 4.75% as we speak. However, there's no guarantee, and if you pay attention to financial news, you know that GMAC is not in the best shape right now. Caveat emptor.

Realistically, I'd just use bankrate.com to find some online banks and ladder some CDs (i.e., buy a 3-year, 2-year, 1-year, 6-month, etc.).
posted by pmurray63 at 7:11 PM on July 1, 2008


Yeah, ignore what I said about muni bond CEFs, I missed that you were looking for cash equivalents. I have a decently sized position that I got into a couple months, ago but I'm planning to hold them for 3-5 years.
posted by kindall at 9:07 PM on July 1, 2008


There's another problem with TIPS. The inflation premium they pay is based on the consumer price index, which is vastly understating inflation right now.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=arn8wSHvKTiU

I can't figure out what to buy as a low-risk hedge against inflation right now. The linked article suggests "derivatives tied to inflation expectations" and "corporate and agency bonds." I have no idea how to invest in derivatives, and corporate and agency bonds aren't low risk. It also isn't clear to me how they are an inflation hedge.
posted by diogenes at 5:27 AM on July 7, 2008


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