A lot of people have been telling Fred where he should put his saved money in the meantime. His dad doesn’t trust banks and suggested that he cash out and keep the money under his mattress. A friend told him that if he really wanted to make his money grow at a quick pace, he should invest it in the stock market. Confused, Fred sought counseling at the Family Life Center, where a counselor educated him about several options, one of which was a certficate of deposit, or CD.
A CD is a relatively low-risk “investment” (if you could even call it that), typically made through a bank or credit union, that will offer higher interest rates than regular savings and checking accounts. If Fred were to purchase a CD, he would commit a fixed sum of money for a fixed period of time (six months, one year, five years, etc.). In exchange for coming this money, Fred would be compensated with higher interest paid to him by the bank. At the end of Fred’s two-year wait, he would withdraw his original amount ($3,000), plus accrued interest (perhaps $60-90, depending on the interest rate he locked in). There are several different
types of CDs these days, meaning Fred won’t necessarily have to lock in an interest rate for the duration, or suffer big penalties for early withdrawal.
Fred weighs his options. His dad makes an interesing point. If the money is under his mattress, he could avoid any shenanigans from the banking system. But Fred is severely accident prone, and the chances of him burning down his home/his cash in a grease fire is fairly likely. He also lives in a bad neighborhood with a decent chance of a break-in and subsequent cash thievery. And to further deter this option, Fred also knows that if he were to cash his money out, inflation would eat away at it over the years. In some ways, Fred sees cashing out as more risky than investing.
His friend also makes an alluring argument. If he put his money in stocks, he would certainly have the potential to earn a higher return. But Fred suffers from insomnia, and he knows that he just couldn’t make peace with the universe if his investment lost half its value overnight. Since Fred needs the money in two years, he decides the stock market is just too risky for this kind of goal.
So, the take-home for Fred is that he wants to earn at least some return on his money, but he doesn’t want to take on too much risk to get it. He decides that a CD is a happy medium ground for this situation. He learned that as long as he invested in a CD issued by an FDIC-insured bank, his money is safe (up to $250,000, that is). And because Fred is just so stinking smart, he researched penalties for early withdrawal (in case he had an emergency), and found out that in most cases, the penalty was only 3 months worth of interest.
So Fred feels great about his decision to put his money in a CD, but when he checks what the going rates are today on a 24 month CD, Fred gets real sad. He sees it’s only at .5%. In fact, an 80 month CD is only offering 1.85%. (The longer the term, the higher the interest rate, he remembers). But before Fred gets really down in the dumps, he remembers that his counselor at the Family Life Center had told him just about all savings/investment rates are abysmally low right now. But everyone seems pretty hopeful they’ll come back up eventually. In the mean time, Fred has several other options for his LeBaron fund, all of which depend on several factors, including the going interest rates. Stay tuned for the next newsletter to find out!
