Cash Better than CDs?
Can putting your money in cash accounts really be smarter than putting it in a CD? Even when you know you won't need the money for over a year? Sometimes it is, when interest rates are rising as fast as they are right now.
The trouble with CDs is that you are locked into a specific rate for a certain amount of time. Now, with declining interest rates this can be a very good thing. I know someone who bought multiple 5 year CDs in 1999 between 6.5% and 8%, and road these high rates straight through the recession. But when interest rates are headed in the other direction, up, this works to your disadvantage.
Let's use ING Direct as an example, since many people have accounts there. Just 2 short months ago the APY for an Orange Savings account was 2.3%, and a 1 year CD APY was 2.75%. Had I bought a one year CD then, I'd be locked in at a 2.75 APY until January 2006. The problem with this, the Orange Savings account is variable, and as of this week now yields 2.8% with no signs of going back down, if anything rates will continue to rise.
My solution is to keep my money in cash for the time being, when the market appears to level out at the top I may start buying some long term CDs.
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I was logging into my Emigrant Direct account today and noticed they just raised their APY to 3.5%. So of course I rushed over to my ING account to see if their rate had changed (seeing as changes are usually blocked together between banks) and ... Read
Too often, people put off saving towards a particular goal because they don't have the spare cash flow to do so. Saving can be very daunting, I recently figured out that to fully fund my child's college education, and assuming a 6% return, I need ... Read
My brother and I argue about this all the time. He keeps all his savings in one savings account, and tracks his different savings goals (vacation, christmas, new home, etc) through quicken. I on the other hand like to keep multiple accounts, one for each ... Read
Picking the top? Sounds like market timing to me.
I'll admit I'm trying to time the interest rates, and sure... I may be wrong. Just like all other investing, there is a risk/reward balance that each person needs to choose for themselves. I think the rates will continue to rise (and if you'll notice they have since I originally posted this) so I'll wait it out.
