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Thread: CD? Or Something Better?

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    #1

    CD? Or Something Better?

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    DH just reenlisted and gets a very generous bonus from this one. We will be getting the first half any time now and then we'll get installments for the next 5 years after that for the second half.

    We need to put this money into something other than our general savings account but neither of us really know much about this. Basically, is money is going to be untouched unless we have a huge, huge emergency otherwise it will be for buying a house someday.

    My mother mentioned a CD and I did a quick search on USAA but I'm kinda unclear on how those work. We do know, however, that we want to make sure that there's not a penalty for withdrawing so that if we do need it we can pull from it for, say, quick plane tickets for major illness/death in the family whenever we go overseas again (those types of emergencies).

    Aside from a CD, I don't really know our options so please school me!! We'll be calling USAA shortly after we get the money but I need to know what kinds of questions to even ask to make sure we choose something that fits our needs.
  2. Quis custodiet ipsos custodes?
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    #2
    CDs work by basically committing to not touch the funds for a certain amount of time (with USAA you can start at 91 days and go all the way up to 7 years) and therefore you'll earn interest at a higher rate than traditional savings accounts. After the CD matures, you have a 10 day period to decide if you want to do something else with the funds, or you can roll it over and continue another period for the CD. You'll also have to decide if you want a variable interest rate (changes with the market), fixed (unchanged), or adjustable (you get a one time chance to adjust the rate). The other difference with those is that you can add to a variable rate CD as often as you want, you cannot add funds to a fixed rate CD, and you can only add funds to an adjustable rate CD one time.

    However, there is a penalty for early withdrawal - you'll have to give up some of the interest the CD would have earned. It's located in the depository agreement, these are the penalties for taking money out before it matures:



    Unfortunately most accounts besides the savings will have a penalty for taking money out early. You can also consider opening several CDs and laddering them (example, open a 3 month, 6 month, 9 month, and 12 month CD) so you'll have some more liquidity if you do need the funds.

    I think you have some good questions to ask, the most important thing will probably be telling them why you don't want to put the money in savings (tempted to use it? want to earn more interest than savings? etc.) and also that you want to be able to have access to the funds with minimal/no penalties if an emergency comes up.
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    #3
    Thank you, Tojai! That was really helpful! We definitely would be tempted to use it so that's one reason why it needs to be put somewhere else so it's kind of an out of sight, out of mind situation. We also would love to accrue the maximum interest we can and still fit our needs.
  4. Quis custodiet ipsos custodes?
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    #4
    You're welcome! I have to go to work so I won't be on for a while but I'm sure when you call they'll be able to help you out.
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    #5
    For a CD, you do pay a penalty for early withdraw. If you do CDs, I'd go with a CD ladder, rather than one CD. That way, you always have some of the money available to you fairly soon, should you need it.

    Basically, the way it works is that you divid up the money. Let's just say its $25,000. You get on CD that matures in 12 months, one in 18 months, and one in 2 years. Keep $5000 in emergency savings (a savings account) and that can be used for the emergency plane tickets.) (Adjust the terms as you see fit, though the rates on anything below a year will suck.) As each CD matures, you put it in to a 2 year CD, and keep they cycle going until you know you will need the money in about 2 years, and then start keeping the money in a savings account as each CD matures.

    CDs are extremely conservative. You will be lucky to keep up with inflation. Personally, I'd take some of the money and invest it in a broad index fund in a non-retirement account. (USAA can help you with this. They offer an S&P index fund that is a cheap option and is pretty stable and conservative, relatively. I think they don't charge any fees for making purchases or trades if you are a USAA member. You would tell them you want their S&P index fund and want to invest $x in it in a non-retirement account, and they will walk you through it. ) The downside is of course that your investment could lose some of its value. But it's an opportunity to use your money to make a bit more money. It depends on your risk tolerance, of course.
    Science always wins over bullshit. ~Dick Rutkowski

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