CDs or regular checking???

yellowhairJanuary 18, 2004

If you had a few thousand to play with, would you put it in cds or regular savings? Or what? Something where you definitely wouldn't lose it.

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I would consider only a very short term CD. Interest rates are so poor, and the differential so minimal that I would go short term and hope for better interest rates in the future.

    Bookmark   January 18, 2004 at 6:31PM
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What time frame are you anticipating?

Do you have any debts, especially ones on which you're paying high interest rates, e.g. store-issued credit cards, or regular credit cards?

How secure is your employment?

Do you have an emergency fund, i.e., if you have no income for about half a year, would you still be afloat?

Do you owe money on a mortgage? At what level of interest rate? Are your interest payments deductible? Can you make additional payments on principal from time to time without penalty? Are you eligible to make such a payment currently?

When you refer to not wanting to lose it, do you mean that you want a guarantee that the value of the asset isn't going to shrink, even temporarily?

If you expect not to need the money for 3 - 5 years or more, it may well make sense to put at least part of it into some high quality stock(s).

You could have bought a share of Berkshire Hathaway, an outstanding stock, in 1965 for $12. Managed by one of the smartest money managers around.

Some say that, as they paid nothing out, you'd have earned no tax-liable income from it from that day to this. But they're wrong: they paid a dividend of 10 cents in 1967.

Had you felt like sellig that share last Friday, you'd have received from $86,000. - 86,300. (less broker's selling commission).

Yes, there have been substantial fluctuations in price range of that stock, as there have been for many stocks, over those years. But long term trend was ... up.

However - that's average annual compound growth rate for the past 39 years of just over 25%.

Not too shabby.

Learning how money works is an interesting hobby - that pays well.

Good wishes as you decide how to invest it.

joyful guy/Ed

P.S. Personal financial advisor for nigh on 20 years, I sold no financial products - no conflict of interest.

Now, to be 75 within a couple of weeks and in receipt of 3 or 4 pensions, winding down the business.

But, as I've become distressed over the years that many know so little about effective money management, that I'm continuing my occasional newsletter for a time, single copy free to anyone who asks who can receive it by email.

Actually - I've presented a number of my ideas here on "Money Saving Tips", "Household Finance", "Retirement", etc. over recent months.


    Bookmark   January 19, 2004 at 12:32AM
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I grew up on a mixed farm in Ontario, so we had several potential streams of income and usually not substantial fluctuation from year to year.

My father moved to farm in Saskatchewan, for health reasons, where in those days there were only one or, for some, two or three, streams of income. Crops, consequently income, differed from year to year.

If one had a year of poor income, one shrugged one's shoulders and said, "Maybe next year will be better".

So I grew up familiar with the idea of fluctuating levels of income. And of value of one's assets.

Consequently having current value of some of my investments drop by a few thousand doesn't get me all bent out of shape.

In fact ... doing some research may indicate that such a time gives shrewd investors an opportunity to buy more such assets - or other similar ones, for some diversification - at bargain prices.

As one mutual fund manager said, " I like to buy a dollar's worth of assets for 40 cents", when some stocks are not in favour.

Good wishes for good health and friends, a measure of prosperity and interesting things to keep you and yours fully alive for the next months.

joyful guy/Ed

    Bookmark   January 20, 2004 at 1:59AM
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Thanks so much for the suggestions. Joyful Guy/Ed, this is my DH's money, so I don't think he would let me put any into the stockmarket, but should I, in the future, have some to invest, I would like to "play around" in the stock market.

I'm going to check on the CD rates at my bank and see what's going on with that. I KNOW there are special "places" where you can invest money to receive a better rate of interest-------my SIL has an aunt who's into banking, or some area to do with stocks, etc.----and my SIL has hinted about such investments they've made.

If I weren't still mad at her (LOL-LOL) I might call and ask her. Aren't there some special government bonds people can invest in? Maybe you already know about these, Ed.

    Bookmark   January 21, 2004 at 6:45PM
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Have you funded your IRA's?

    Bookmark   January 22, 2004 at 4:54PM
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Sorry, I'm unfamiliar with the U.S. situation.

Gina in FL refers to tax-free municipal bonds, from time to time.

Usually corporate bonds pay a little better than governent ones - and there are some corporations, e.g. major banks that aren't going to go broke.

Here in Canada we used to have only half a dozen or so major banks, but in recent years other banks have come into being, but they don't have a nation-wide branch system like the others.

Up here, ING Bank offers higher rates of return than most of the traditional banks with a large local presence. ING, a Dutch-based outfit, is a substantial bank - but they ask you to send a cheque on your local bank, and when they return the money, send a cheque - which you cash at your local bank.

I'm pretty sure that they are active in the U.S. - if you may be interested, ask Google for ING bank, see what happens.

If you might need the money unexpectedly, you can put it into a money market account, that pays better than a savings account.

In order to get higher interest, usually you must tie up the money for a definite period. Which means that it's not available in case of emergency.

In case of emergency, you can almost certainly use it as collateral for a loan at the same institution, most likely, for a rate of interest only slightly higher than they're paying you on the instrument.

If I had a loan to buy a car and could pay it off when I chose, I'd probably pay it off, as in our tax situation few can make the interest on a car loan deductible.

Then borrow some money to invest - but not into such as guaranteed certificates, as they'd pay me at a lower rate than I had to pay for the loan.

In Canada, we have advantageous tax rates on dividends that Canadian corporations pay on their stock and on the gain in value when one sells the stock for more than one paid.

I've formulated a scenario where I figure that someone could earn a substantial income and, if the projections worked out, pay almost no income tax.

Haven't tried it in the real world, though.

Doubt whether I'd have the nerve, even if I had assets enough to allow me to make that large a loan - for it entails borrowing several hundred thousand to invest.

Interest on money borrowed to invest is deductible in the current year. One must answer to the tax people for dividends earned in the year they're earned - but capital gain that's developed in a stock over the years doesn't attract tax liability until it's sold (or the owner dies, when it is assumed to have been sold on the day before the death).

Sorry that I can't be of more help, Yellowhair.

ole joyful

    Bookmark   January 22, 2004 at 9:59PM
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If you had a few thousand to play with, would you put it in cds or regular savings? Or what? Something where you definitely wouldn't lose it.

If my only choices were a CD or regular savings and this was money that I was "playing with" -- meaning, that it wasn't my "emergency fund," etc., I would choose whichever paid the highest rate of interest.

But I would more likely look into money market funds, some of which pay returns that are better than savings accounts and have the advantage of not requiring that the money be committed for a period of time, like CDs.

If you "definitely" don't want to lose any money, it is unlikely that you will be able to obtain a significant return.

If a safe investment is your priority, you might consider U.S. T-bills or bonds.

    Bookmark   January 24, 2004 at 10:55PM
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Thanks for all of your comments. I'm sorry to say that we don't have an IRA account to fund. Very sorry. I'll do some checking on the T-bills and bonds. Thanks again.

    Bookmark   January 25, 2004 at 3:06PM
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Hi again Yellowhair,

There are two rats that eat our cheese.

One of them is labelled, "Income Tax".

The income tax people want to talk to you each year about your earnings that year.

Here in Canada they charge different rates of tax on different types of earnings: top rate on employment, pension and interest earnings.

Lower rate on dividends paid by stocks of Canadian corporations. Or if you sold an asset this year for more than you paid, they charge regular rate of tax - but on only half of the gain.

Would you call me a cynical old man if I suggested that those two latter kinds of income are the ones that the wealthy tend to favour?

The second rat? Inflation.

As you know, $10,000. today won't buy as much as $10,000. bought, ten years ago.

If we invest in an asset where the amount of our principal is guaranteed not to drop - it's guaranteed not to increase, as well.

So - at the end of each year, we need to take enough money that our principal earned this year to add to the principal in order to keep up with inflation, so that we don't lose purchasing power.

The investor gets to keep what's left.

At current rates of interest, that's not much. If any.

And - don't forget - the rats eat first.

Good wishes for success in your financial future.

ole joyful

P.S. Learning how money works. An interesting hobby. That pays well.


    Bookmark   January 25, 2004 at 7:42PM
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Skip the CDs, and see about a Vanguard or Fidelity Bond Fund.

You'll get much better rates, and very very little risk.

CDs, with rates as low as they are, end up costing you money in the long run given the inflation rate combined with the tax rate on the dividends.

    Bookmark   February 2, 2004 at 11:52AM
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