Invest, invest, and invest. If you're not saving you should be investing. Or people say. If you're new to investing and are concerned with risk, a certificate of deposit may be the easiest option for you.
A certificate of deposit, a CD, is a savings certificate with a fixed interest rate and affixed maturity date. Basically, it's a savings account with a fixed interest that you can't access for a certain period of time. The higher the interest rate, the more your CD will yield. Since the funds have no liquidity, the pay off is the yield from the interest. CDs generally considered low risk investments and the FDIC insures CDs up to $250,000.
All commercial banks offer CD accounts but you will most likely get a better deal from lesser know banks like Ally, Barclays, CIT, or other online banks. The longer the term, the better interest rate you will get. However, the longer the term the longer the risk associated with the CD. A major drawback is that if an interest rate significantly increases during the term you will not be able to benefit.
Some banks, not all, offer rate bump CDs, where you can request an interest rate bump if market interest rates rise during the tenure of the term. The bank doesn't do this automatically and even if you ask for the interest rate bump it isn't guaranteed yes. Ally Bank and CIT bank offer rate bump CDs, but there's different stipulation for the accounts. CIT requires a minimum of a $25,000 deposit and Ally only offers bump-rate CDs on two and four year agreements.
So, should I open up a CD account?
Right now? If you are looking for a high yield investment, then no. CDs are most beneficial whenever there is a high interest rate. Since interest rates are so slow, the interest rate will not yield substantial earnings at this time. For example if you invested $5,000 in for a 24-month term with an interest rate of 2.5 percent that compounded daily, your earnings would be $256.08. However a CD does generate more interest than an average savings account. If you are saving for long term goal and want to prevent yourself from dipping into the money, then a CD might be viable option for you. Keep in mind that you will be hit with a penalty fee if you withdraw money from a CD before it come to full term.
A CD ladder could be the happy medium. The Federal Reserve is planning increasing the rate at least three more time in the next year. As the economy strengths, interest rates generally go up. Creating a CD ladder would allow you to take advantage of increasing rates and have more liquidity. A basic CD ladder will have at least three rungs. Each "rung" is a CD with differing interest rates and term agreements. Let say you have a one-year, a two-year and five-year CD. When the one-year CD agreement ends, you would open a new CD at a longer term with the money. That way you will be getting a higher interest rate as your money grows.
When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.