So if you haven’t noticed, the feds are slowly increasing interest rates. As I have said in the past, this doesn’t mean the sky is falling. And most importantly, there are ways we can capitalize on the benefits of this act. How specifically? We can leverage Money Market savings accounts and CDs (Certificate of Deposit). What are these funny sounding devices?
A CD (Certificate of Deposits) can be viewed as a savings account that gets locked for a period in time. To be clear, “locked” just means, if you access the money before the agreed duration, you’ll lose all the interest earned. Unlike the stock market, there is no threat to the principle, generally speaking (please always read the fine print). As CD is a great tool to diversify your portfolio and reduce risk. I only say reduce risk because invested money could be lost. With a CD, the bank is just holding the money for you.
Money Market Accounts
Money Market accounts usually work in the same manner as a CD. And depending on the agreement, you may be able to withdraw some of the funds without a penalty. Usually, there is a price to pay for this convenience. Meaning, Money Market accounts, usually have a lower interest rate than a CD.
For the duration of this post, I will simply mention CDs. But just note, Money Market account rates usually trail. To give a baseline, here has been the CD rate chart.
Note the 2% in the screenshot. That is a big deal because inflation is arguably somewhere around 2 1/2%. So, if you have stored your money in a CD for the last 15 years, the amount you saved is now worth less due to inflation. But times, they are changing…
Current CD Rates
Oh yeah, we are beating or at least matching inflation with no threat to the principal amount! If you have some liquid funds sitting around. Now would be a good time to take advantage of the CD rates. As for me, I am considering buying an investment property 18 months from now. So I have a nice stash of cash that I plan to store in a CD. Doing the math, I stand to make a couple thousand dollars when my CD of 3% matures 18 months from now. All passive income. My future self will thank me.
Footnote from The Intelligent Investor :
It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds. From this there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. The minimum return goes to our passive investor, who wants both safety and freedom from concern.
This post has been another entry in my investing series and lessons on money. How does investing work and how can we grow our funds? Perhaps we can create some rules of engagement. Perhaps we can avoid investing in schemes we don’t understand based on emotions.