certificate of deposit

kasbnApril 16, 2008


My son is getting married later in the year. They will get everything they need to start a home.

I would like to give them 500.00. But, I don't want to give them cash. I would like to give them or start them some sort of savings.

Maybe start a savings account. Or get them a cd. Now, I know nothing about cd's. Have been doing some reading, and it seems like a low risk savings.

I was wondering if anyone could explain in simple terms how this works. Is it low risk? What exactly do I need to look at?

Any advice will be much appreciated.



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A CD is very safe. Right now the interest rates aren't great, but it's something.

To buy one, ask at your local bank. Shop around by inquiring at other banks about their rates as well. The length of time will vary. You can choose a 3 month CD, a six month CD, a year CD, and so on. If he cashes the CD before the time is up, he'll forgo the interest and may have to pay a penalty.

Does your son have an IRA? If not, that'd be a nice gift, or a contribution if he does have one.

    Bookmark   April 16, 2008 at 6:01PM
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Thanks so much for helping me.

As for an IRA, I don't believe he does. But, I thought you would need more than 500.00 for that.

I really don't fear them cashing it. Although always a possiblity.

I just know, they will get dishes, sheets, towels and what nots. My plan was to do something a little different. Maybe help them think about their future a bit more.

Again, thank you very much.

    Bookmark   April 16, 2008 at 8:00PM
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A CD is just a savings instrument from the bank. As such, they're insured as any bank account would be, so you're right they're low risk.

Unlike a passbook or statement savings account, you have to commit to a certain period of time for a CD--if the money is taken out before the CD matures, there is a significant penalty. So they should only be used for savings that most likely won't be needed in the near future.

They generally do pay more than a passbook or statement account. But right now, the rates are the lowest I've seen them in years. I've got a couple of CD's coming due in the next month, and I'm going to take them out and put them in my passbook, because at this point, the only CD's that are paying more than passbooks at my bank are 5 year ones. And at this time, you DO NOT want to commit your money to 5 years at these low interest rates.

Besides the economic inadvisability, right now, of tying money up for long periods at low interest rates, I think there's something else you really need to consider. When you give a gift, it's just that. A gift. It's not fair to give one with strings attached. If you want to give them $500--just give it to them and let THEM decide whether to save it, spend it, or stuff it in their mattress.

Actually, though, this whole discussion is moot. You cannot take out a CD for someone else. They have to give their social security #, and have to sign the papers themselves. Just give them a check, or cash.

    Bookmark   April 16, 2008 at 8:04PM
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Well then.

Thanks for the info on not being able to buy one for someone. I didn't know that. If I chose to do that, I could get them to sign, no biggie.

I am aware of what a gift is. No strings.

I am also aware that if given something that you might start yourself, it might make you think. So my intent, is to jumpstart a savings plan.

Not really a moot discussion, I did come asking for advice.
And I thank you for that.


    Bookmark   April 16, 2008 at 9:24PM
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Hi kasbn,

An asset in a bank account is available at any time ... and usually the interest rate is low, especially on one with a small balance.

A certificate of deposit may be restricted to thousands of dollars, but I think in many cases may not be. Usually issued for a specified period, and often for terms under a year, plus if one wants to cash one early, it may be not possible, or if so will almost certainly require a substantial penalty.

There are bank-issued instruments that run for longer periods, around here called Guaranteed Investment Certificates (GICs) that often run from a year or so till usually 5 years. The issuer of both of these guarantee that they'll be redeemed at the end of the term for the same number of dollars that was invested, plus the interest. Some can be redeemed early, some not ... but if so, there's a penalty.

On the other hand, for longer periods (1 - 30 years or so) one can buy government-issued, or corporate-issued bonds, usually paying a higher rate of interest. This can be directly at issue, or in a secondary market (i.e. some agencies will buy the bonds that people want to redeem early and resell to other investors).

The amount is guaranteed at the time of redemption, but in the meantime if you want to sell a bond paying 5% but current rates are 6%, a buyer won't want to pay you $100. for your $100. bond when s/he can buy a freshly issued one for $100. that'll pay 6% for, say 6 - 10 years or so.

I'm wondering what your purpose is ... do you want to encourage your young ones to start on a savings and investing program, and to stay with it through their adult years?

There's are some problems with buying guaranteed paper ... that increase as the years go by.

If you'd loaned $10,000 to the bank in a 5-year GIC, 15 years ago, and renewed it twice since, you would have to accept the going rates at the time of renewal.

Also, they guarantee to repay every dollar that they borrowed, but there's another guarantee that they never mention - they won't pay you one dollar more, either.

When you loaned your dollars to them, those dollars would have bought a decent car. Not now: the price of cars went up, but the number of your dollars loaned to the bank stayed the same.

But each of those invested dollars would buy less each year than it would have the year before, as inflation erodes the value of each dollar, each year.

There's an agency that asks you a question each year, and makes a statement - the income tax people ask how much you earned and tell you that they want part of it. So you have to pay tax on each of those dollars of interest income.

The only income that each of those invested dollars will produce relative to this year is earned right now, and taxed now.

And, since the value of each of those invested dollars shrank every year, you needed to put part of the annual earnings with the principal to keep the value intact.

After you pay the tax ...

... on all of the income that those invested dollars will ever produce relative to this year's business ...

... and put part of this year's earnings with the principal so as not to lose purchasing power ...

... you can keep what's left.

Which in recent years has been very little ... if anything.

How do you like letting someone else use your money, when they make money on it but you end up getting almost nothing for it?

Many people are afraid of the stock market.

If you invest in stocks, you usually don't know whether the value will go up or down ... so many people are afraid of it. But there, the most of the risk is over the short term. If I buy a quality stock, I don't know whether it'll go up or down over the short term ... but over a number of years, for many high quality stocks the risk reduces substantially, as the general trend of the market has been upwards.

Often the value of the asset increases. But one does not need to pay tax on the increase until one either sells the stock ... or dies, when it is assumed to have been liquidated. And taxable ... but not during the time that the asset continued ... only when one sells it, or dies.

I like to have an asset grow in value, and not have to pay tax on the increase for as long as I keep it.

Then, usually it is usually taxed at a reduced rate.

If I can not only defer tax, but pay it at a lower rate, I like that all the better!

I bought stock in a Canadian bank 41 years ago for slightly over $4.00. Rather than put my money into a bank ... I prefer to buy (part of) the bank! At that time it paid me about a dime per year as a dividend ... which in Canada is taxed at a much lower rate than is interest income.

Just before summer, I could have sold it for about $106.00 per share.

However ... they are involved with some of the Asset-Backed Commercial Paper (ABCP) stuff peddled by some irresponsible financial people in the U.S., who had it rated as high quality stuff, that turns out to be very questionable.

Not only that ... they were backing an insurance company that had insured some of those risky mortgages.

The value of the shares slipped to the 90s, then the 80s ... and have gone down through the 70s and 60s till they were just under $60.00 for a short while recently, now have recovered some.

Am I about to sell them? No - I expect that, give them a while, that they'll recover. Last year, they'd doubled 4-1/2 times in the 41 years ... now it's about 4 times doubled ... but that's far higher than I'd have gained in a GIC. And no tax to have paid on that increase in value of the basic asset, yet.

And when I choose to sell it (or die) the increase will be taxed at half regular rate (unless they change the rules).

That dime or so that that stock paid me 41 years ago has increased, over the intervening years, as well.

A few years ago, it paid me $1.80 per year, then through $2.00 per year to $2.80, about three years ago to $3.08, and last fall increased to $3.48 per year. As a result of the recent U.S. financial debacle, they may reduce the rate ... but don't forget they're paying $3.48 on a stock that I bought for about $4.20, 41 years ago.

Plus - that dividend income was taxed at a much lower rate than wages, pensions or interest until a couple of years ago.

Then they reduced the tax rate on dividend income even more.

Many people choose to use mutual funds to get more diversification in the stocks that they buy, but the mutual fund guys charge almost as much to manage the money as the tax that one pays on it, and very few produce larger growth in the money than the average growth rate of the market as a whole.

Or some choose to buy a piece of a substantial part o the market in what's called an Exchange-Traded Fund, sort of like a mutual fund but at a much lower management fee.

I've suggested to many over the years that they learn how money works and buy individual stocks on their own.

There are some stocks in the U.S. that one can buy directly from the company, without needing to use a broker.

You've heard of Warren Buffett, one of the smartest money managers around, I imagine, who was the richest person in the U.S. for a number of years? He manages Berkshire Hathaway, that one could have bought in 1965 when he started to manage it for $12.00 per share. Some say that he's never paid a dividend, but they're wrong - he paid $0.10 in 1967.

The value of one share of his stock atthe close of the market today was $129,475. - as he's never split the shares as their value grew. A few years ago they issued some shares at 1/30th the value of the original shares.

That's average annual growth rate of 24% per year. That's a very unusual record, to be sure. But the average growth rate of the quality part of the market has been about 8 - 10% per year ... though some think that it may be some less than that for the next few years.

But many people believe that, for young people just getting married, who have a 40 - 50 - 60 year time horizon ...

... stocks are the way to go.

Although I am nearly 80 years of age, I hold about 80% of my assets in that kind of investment, as I have found that they have produced well, over the years.

If your son has built up some invested assets, such as GICs, bonds, or mutual fund or stock certificates, if he wants to buy a car and can use them as collateral to undergird a loan, quite likely the interest rate that he'll be required to pay will be somewhat lower.

Good wishes to him and his partner for the years ahead together.

When problems develop ... ask him to please deal with them, to get them resolved, before they get serious. I hope that they are not only still together ... but one another's best friends ... after 40 - 50 years and more.

ole joyful

    Bookmark   April 16, 2008 at 9:48PM
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If you're trying to encourage your son to save for the long term, and you can manage $1,000, you might consider opening a mutual-fund account for him at Vanguard instead of a CD. Of Vanguard's many mutual funds, there is exactly one of them that lets you open an account with as little as a $1,000 balance, namely the STAR fund (VGSTX). That fund happens to be balanced and widely diversified--one could do a lot worse as a long-term savings vehicle.

The real point of opening such an account is that it gets your son over the psychological hurdle of dealing with the paperwork. It is *much* easier to deposit additional money into such an account once opened than it is to open it in the first place--just fill out a deposit ticket and mail a check. Or, if he signs up for online access, transfer money electronically from his bank account.

It's the initial paperwork that's the hurdle, even though in practice it's just a few pages.

Incidentally, I'm mentioning Vanguard by name only because I have an account there so I can speak from experience. I am sure that other mutual-fund companies offer similar facilities.

    Bookmark   April 17, 2008 at 12:39AM
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Have you considered a US Savings Bond as a gift? I do those all the time for people I want to encourage to save.

Here is a link that might be useful: Savings Bonds as Gifts

    Bookmark   April 17, 2008 at 9:20AM
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Chemocurl zn5b/6a Indiana

I think it is wonderful that you are wanting to introduce them to the idea of saving, but am left wondering if your son was encouraged to save and had a savings account when he was growing up. Was his bride to be taught the advantages of saving?

Years ago, when 2 young friends graduated from high school, I bought them each a $100 Savings Bond, (my cost $50). It was my hope to introduce a savings tool to them as they grew up in poverty with parents part of the I want it now generation, that had never learned how to handle their income.
My plan worked for a while as the 2 young adults even asked that I hold their bonds for them since they had no place that was safe. In time they both 'needed'(?) the bonds for something...sigh.
I bought the bonds in their names, and all that was needed was their SS numbers. The bonds were then mailed to me and I presented them with my 'gift'.

Maybe something to consider.

Savings Bonds were my introduction to my first real savings back in 1969. My boss (and friend) encouraged me to buy bonds through the Payroll Savings Plan. That was when I first learned about paying myself first and if I didn't see the money or get it in my hand, then I wouldn't spend it. Back then I was a paycheck to paycheck sort of person, and can still remember the stress it caused when something unforeseen happened. I later sold them when I was getting together a lot of money to have my house built. I scraped together about 50% of the cost to build.


Here is a link that might be useful: Introduction to Saving bonds

    Bookmark   April 17, 2008 at 9:49AM
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You might consider purchasing an I-Bond for them. I-Bonds currently pay 4.28%. It is a government bond (safe) and the rate increases if inflation rises. You cannot cash an I-Bond within the first year, and if you cash it between years 2 and 5, you forfeit 3 months interest. It should not be used as an emergency fund, but it's a nifty savings tool.

Here is a link that might be useful: I-Bonds

    Bookmark   April 17, 2008 at 12:13PM
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I think the savings bond idea is a good one.

Put it away and sometime down the road, they will have it to use as they want. Hopefully keep it, but if not, it's there.

I have a niece graduating this year and I have been guessing what to give her. I think this is also a good idea for her.

Thanks to everyone who gave me information and ideas.


    Bookmark   April 17, 2008 at 7:38PM
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I'm a little late to the discussion, but if you still want some basic information about CDs, there's an article on that on the web site below.

The problem I see with savings bonds is that the rate is so low there is usually not much incentive to hold them versus cashing them. That's what I used to do when I was younger.

At least with a CD the money is "locked away" for a little while, for them to watch it grow. I'm sure, as you say, you can get them to sign the papers.

A mutual fund would likely offer better long-term returns, but (depending on how you view it) in some ways that's a different lesson -- equity investing -- versus savings.

Just my thoughts, best of luck!

Here is a link that might be useful: Best CD Rates

    Bookmark   May 29, 2008 at 1:29PM
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The problem with Cash, Bonds, CD's, etc is that the rates are so low... some even below inflation. Think about this for a second with your $500.

If you put it into a CD that earns 1%... that will get you $5 in interest for the year. Now your total at the end of the year is $505. HOWEVER, lets say inflation is at 2%... That will cost you $10.

To sum it up you have this: 500 starting + 5 interest + -10 for inflation = $495 let to spend at the end of the year. Putting that money into a CD, BOND, etc just cost you $5.

It sucks that savings rates aren't where they were many years ago. Back when I was in high school I would take $20K and buy a CD @ 6%.

    Bookmark   May 24, 2013 at 3:58PM
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It might work for your kids but it would not have worked for mine. They would have gone down as soon as they needed a bit of cash and probably loose some of the money for cashing it in without waiting till it matured. I would just give them the money and say have fun.

    Bookmark   May 24, 2013 at 8:23PM
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5 year old post... I would bet that the OP settled this LONG ago!

    Bookmark   May 27, 2013 at 3:22PM
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I keep forgetting to check dates.........

    Bookmark   May 27, 2013 at 8:28PM
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