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Sunday, April 12, 2015

A Certificate of Deposit with A Rate Raise Option

In my last post, invest in the stock market in 5 simple steps, my goal was to inspire all of you to get into the stock market.  After reading in an article that 52% of Americans do not participate in the stock market, I saw this huge need to help this segment of our country realize that there's nothing to it, and the risks are mitigated over time, given a decade or more in the market.

As great as I am at inspiring people, I know many readers will still go back to status quo, relying on their savings strategy...which is no strategy at all.  The Certificate of Deposit or CD, is better than putting money in a savings account.  And although it is often referred to as a "Certificate of Depreciation" by investors, especially in a low-interest rate, high inflation environment, there are times when a CD makes a little more sense for people who simply will not enter any market.  This is one of those times.

According to: http://www.usinflationcalculator.com/ the rate of inflation was -0.1 for January and 0.0 in February, meaning that "overall" inflation was non-existent.  March's rate is soon to come out.  I would keep this website handy and check back for March's inflation rate and every month there after so you can see how much ahead of inflation you are staying with the CD I'm about to promote (I'm not getting paid to do it...none of these links earn me money).

At Ally Bank you can get a 2-year CD for 1.29%.  There is no minimum deposit!  That's great for many of you who may not have that much money to invest.  You could invest whatever amount of savings you won't need for two years.  Compare Ally to other CD's: www.depositaccounts.com/cd/2-year-cd-rates.  You will see that many of these do have deposit minimums.  Ally's rate is not the highest but...it does one better.

Say inflation should rise to 0.5%.  Your effective interest rate now becomes 1.29 - 0.5 or 0.79%.  Well...that sucks!  Your money is growing at a lower rate than you expected (1.29%).  Making matters worse, if CD interest rates should rise, you're stuck powerless holding onto a rate you got in the past.  Or are you?  Not with Ally.  Ally will allow you to get a better rate on your two year CD one time!  Since it is a one-time thing, you want to be smart about when to set your new rate.  If there is an interest rate spike, and within two months of getting your CD you see CD rates at 2.0% with people predicting it will stabilize, I'd call Ally and change my rate. Otherwise, you could simply wait for the one-year anniversary of your CD and do it then.  So you'd get 1.29% for year one and X (new rate) for all of year two.  One last perk with Ally, there are no maintenance or hidden fees.

Savers, take a step up and at minimum have some of your money earning interest.  Your savings account is where money goes to die.  If you're not going to ever invest in the stock market, the least you can do is give the money in your savings account a new lease on life and place it in a CD.  Go with Ally's 2-year CD with one time option to raise.  I like it!  

Thanks for reading!  Have a financial question?  Email me: info@commoncoremoney.com.  Always here to help.

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