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Investing in CD's?

Moms View Message Board: General Discussion: Archive April 2006: Investing in CD's?
By Cat on Friday, April 14, 2006 - 10:53 am:

When dh and I close on our current house we're going to invest the equity. We're looking at a local bank that's advertising 11 month CD with a 5% return (10K min). Anyone have any thoughts on this? Dh feels it's safe and guarenteed. I agree, but think we could get more for our money doing something else. Does anyone have CD's now? Are you happy with them? We've never really invested before so we're new to this. We close next Friday but don't have to do anything immediately. Thoughts? Advise?

By Sunny on Friday, April 14, 2006 - 11:13 am:

If you're new to investing, putting the money in a safe investment like a CD is a good idea. It will give you time to research and decide exactly what kind of investments you want to make. No, CDs won't make you much money, but it is guaranteed, which is one of the reasons a conservative investor uses them.

I have one CD and I look at it as "safe" money. There is no risk to a CD and the lower the risk, the less money you make. But, I know it is making some money and I know that I can't touch it (I refuse to pay a penalty). It is the most conservative of my investments, though, and I know that when it matures, I have the option of reinvesting it in another CD or investing it elsewhere.

So...my suggestion would be to put the money in the CD - and 5% sounds pretty good for 11 months - and educate yourselves about investments, risks, etc. over the next year so you'll have a better idea of what you want to do with the money when the time comes.

By Sunny on Friday, April 14, 2006 - 12:00 pm:

I've been thinking about this and I realize that it's easy for me to suggest what you do with your money, but I want to emphasize that it is only a suggestion. :) Maybe a better idea would to look into putting the money into a money market account or regular savings account. That way, you'll have access to the money if you decide to invest in other ways. The one piece of advice I would strongly advise you to take is learn as much as you can! :)

By Cat on Friday, April 14, 2006 - 12:22 pm:

Sunny, that's why I posted this! I want to learn about the different investments. :) Believe me, I'm not going to let anyone just tell me what to do with my money. :) We're absolutely going to look around at different things. Thanx for you input. :)

By Karen~moderator on Friday, April 14, 2006 - 12:37 pm:

How about opening IRA's for each of you? You could fully fund them for 2006.

By Sunny on Friday, April 14, 2006 - 12:41 pm:

You mean my word's not gold?

Take a trip to the library and check out investment books; research pros and cons of different types of investments online; talk to a financial advisor and yes, get others' experiences here. It all seems so overwhelming at times, doesn't it? Good luck! :)

By Cat on Friday, April 14, 2006 - 01:25 pm:

ROFL, Sunny! No offense, but I was always taught to check things out for myself (I'm Wesleyan, can ya tell??? ). :)

Karen, I've thought about IRA's. One thing I am taking into consideration is taxes. Would what we'd save doing something other than a CD be worth the difference in interest? We'll have to check.

By Reeciecup on Friday, April 14, 2006 - 01:45 pm:

Cat can you explain to me how investing the equity works? I always thought equity sat in your house unless you borrowed against it or sold the house. Do you mind sharing more info on what it is you are doing with your closing and how this works? Thanks

By Reds9298 on Friday, April 14, 2006 - 02:30 pm:

I'm assuming by equity you mean the "profit" you're going to make on your house when you close, right?

Just a question, and TOTALLY none of my business, but...so you're not using that as a downpayment toward your new house? Just wondering. As you get closer to retirement age, having your home paid for will be a great advantage and your equity money could get a jumpt start on that. Again, none of my business, just throwing it out there!! :):)

If I were you I would check out a book or two (I think a great beginner book that's easy to read and is a great overview is The Everything Investing Book.There's a whole Everything series on different things.) Then I would ask friends and family (locally) for recommendations for a financial advisor that can sit down with you and more thoroughly go over the options you have for what YOU want out of this money. You want someone who will listen to what your comfort level is, and NOT someone who is constantly trying to "sell" you something. (Just learned that from experience!)

A CD is a very safe and also low return way to go, but it depends on what you're plans are for this $. If you want to use it for something in a year or so, then a CD might be a good way to go. Sticking it in a mutual fund for a year is likely not going to get you too far, and could incur losses. Mutual funds are better for around 5 years or more, unless of course it's $ you don't care about anyway. (Such as if losses wouldn't bug you too much because it's not "needed" for example.)

If you just want to invest it and let it go (no plans for it), then I would recommend a good mutual fund that you can decide with a financial advisor who should go over the prospectus (how the fund is doing/has done in the past) with you so that you can make a decision.

We have half of our retirement in mutual funds outside of our respective employers (my former employer), one mutual fund just because, and then a custodial account for Natalie's college fund. We tend to go middle of the road on our funds, nothing high risk and nothing too safe either, but ours are also long-term and not something that we plan on using in the next 5 years, you know? Karen's suggestion to use at least part of your money for an IRA is a great idea, too. It's a nice tax write-off at the end of the year and it's not tied to a company that might go under at some point.
Good luck!!

By Marcia on Friday, April 14, 2006 - 06:02 pm:

You are much smarter to call a financial person rather than a bank. Banks make way more money for themselves than they do for you! We deal with Citigroup, and we get a great return on our money. I know a couple of people who used to be in banking, including my SIL, who strongly advise against investing with the bank.

By Reds9298 on Friday, April 14, 2006 - 07:33 pm:

Ditto Marcia on going with a bank!

By Dawnk777 on Friday, April 14, 2006 - 09:40 pm:

My kids got money from Grandpa's estate. We put it into 2-year cds. Time for renewal, now, so we made Sarah's a 13-month cd, since college is coming up soon enough and put Emily's back into a 2-year cd, since her money can stay put longer. They had specials for each, so the interest isn't too bad, either.

By Ginny~moderator on Friday, April 14, 2006 - 10:35 pm:

I also think a CD is a good idea for the short term. A bank CD is covered under FDIC insurance, which covers any account up to $100,000, so that is about as safe as you can get short of under the mattress. An 11 month CD sounds good. With interest rates rising slowly every 3 to 6 months, I personally wouldn't get into long-term CDs with fixed interest rates.

As for long term investing, I strongly suggest you do a lot of research. Start with Consumer Reports, which does an annual report on mutual funds, with lots of explanations, and ratings. My middle son works for an investment bank, and I went to him for advice on my 401(k). He said - and you will hear this from any neutral investment counselor - that what you invest in depends on a couple of things. First - your age: the older you are, the less time you have to ride out stock market fluctations before you retire. Second - how much risk you feel like taking and how much risk you can afford to take. If this $10,000 is your main investment dollars, you really are not in a position to take a lot of risk. Personally, I am pretty much risk adverse.

What I would suggest is that you spend the next several months investigating mutual funds, with Consumer Reports, and by reading the investment columns in a number of newspapers. You can access newspapers nationwide on the internet, and I'd suggest starting with the NY Times and the major newspaper in your nearest major city. If it were me, I'd pick a mutual fund that is highly rated by Consumer Reports, and select three or four funds in that mutual fund program, on the basis of what their past history has been and how much risk you do or don't want to take. Most mutual funds have a variety of funds ranging from as safe as Treasury bills to electronics, to health care, to foreign investments - a whole range. Most mutual funds will also have some mixed funds based on the Dow Jones stocks and some other mixes - they are usually called balanced funds.

Once you make a decision that you and dh are comfortable with, split your money as much as the mutual fund will allow. Some require a minimum investment ranging anywhere from $2,500 to $10,000. Track it on a monthly or quarterly basis, and add to it as often as you can.

You'll want a no-load fund. All mutual funds charge a maintenance fee, that ranges from as little as .5% (of your balance) to as high as 3%, which is money that is deducted from your account annually. But some funds are "load" funds, and they will take a percentage of any money you put in off the top, which is money that is gone and not invested. So no-load funds are far and away better.

And I strongly agree about not investing in a bank fund or taking investment advice from a bank. They usually produce the smallest return and the highest fees.

For the questions people raise above, I am assuming you have made a downpayment on your new house and will have no problems handing the mortgage payments - that this is profit from the sale of your house that isn't needed for downpayment, moving expenses, or immediate repair/remodeling/new furniture costs. That makes sense to me. Mortgage rates are still fairly low, so investing this money in something reasonably safe with a reasonable rate of return makes sense. If you put it into payments on the mortgage and suddenly need funds for an emergency, you can't get the money back from the mortgage company. But even with a CD, you can redeem it early and take the interest loss, but have the emergency funds you need.

By the way, most investment advice I've read says that you should have 3 months living expenses in a liquid fund (i.e., some sort of savings program that you can tap fairly quickly) before you start tying up money in long-term investments.

An IRA is OK, but if you tap that money before you are 59-1/2, you not only pay taxes on it, you pay a large penalty. The advantage to an IRA is that the money you put it in, up to the maximum, is tax-free until you withdraw it (you deduct your IRA deposit from your taxable income). The disadvantage is that it is not truly liquid before you are 59-1/2. You can do an IRA account with almost any mutual fund, and they usually have smaller minimum requirements for IRA accounts, because they know they will have your money for a long time. I hope, by the way, that dh has a pension plan or 401(k) at work and he is putting the maximum into it.

By Cat on Friday, April 14, 2006 - 10:55 pm:

Thanx for all the input! So much to think about! :) Yes, this money is profit from the sale of our current house. We could use it towards the new house, but feel it would be better to invest it at this point. Our mortgage on the new house will be managable without this extra. And with the kids going to college in 5 and 7 years (gasp!) we want something that will help with those expenses when they come up. We will probably end up doing the 11 month CD for now and spend the next 11 months researching other options. We'll see what we come up with! :)


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