So confused about CDs (not the music kind)

#1

Hello!
First time posting and I have a general and specific question on CDs. Short history - years ago a divorced destroyed my financial security (not uncommon). My money was in chaos, and in order to build some credit I got a credit card through my credit union. To do this I had to purchase a 2-yr CD as collateral (might not be the correct word there). Short story long, it has now been 4 years, and I now have 2 bigger, better, rewards cards and my credit score is meh okay. And I have not done a thing with this 2-yr CD.
I guess my question is - it has been longer then 2 years what happens to the money of a CD after that time period? It seems to have not changed much, it is getting a very small amount of interest, but the bank has not said anything about renewal or anything. Do I need to do anything with this? Is it okay to leave this money here and just look at it as a savings? The card is connected to my checking account, and is set up to be a safety net in case something happens and I overdraft (it has never happened, but you never know right?).
I have the Get Your Money Together, and I listen to the pod, but I am still at a loss of what to do with this CD - if I should do anything at all?
Thank you so much for anyone who read this whole post, and anyone who has any advice!

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#2

The CD will continue to accrue interest as the bank must be automatically renewing it. They should be sending you a notice before each renewal, as that is the period of time where you can cash out the CD without penalty. At renewal, they may be able to change the interest rate (i’m Not sure about this). But in any event, you are probably getting a lower interest rate than current rates, since these rates have been going up recently (last year or so). If you take out your money outside of this window, EVEN THOUGH THE CD HAS MATURED, you will be assessed a penalty. Honestly, it’s probably not that much - I would close it even just to tidy up accounts (or buy a higher interest CD).

I am not a big fan of CDs, but they are a really safe and conservative investment vehicle.

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#3

What gdogg said :slight_smile: although I’ll add that I’ve seen CDs both that auto renew, or that just cash out and sit in an account with the bank at their normal savings account rate. You could always call your bank and ask! :slight_smile: in my experience, people are pretty nice and patient with explaining that stuff.

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#4

Definitely call or go to the bank!

And, I realized I didn’t explain why I am not a fan of CDs:

  1. Locks up your money for a set period of time;
  2. Low return (interest rate); and,
  3. The penalty-free window to act continues AFTER ‘maturity’ - locking you in to another period.

But, the good side is that the return is guaranteed.

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#5

I did some more digging, and it looks like it matures (a second time) in August. This means I can pull my money from there at that time yes?
I feel conflicted about CDs. When I first started I knew nothing (I don’t know much more now) but knew that I needed this for my credit card to help with my credit score. I also want to invest in something that is not my 401K, something where that money is more liquid and I could actually use it when/if I needed. I wish there was a better way to get interest in something without locking it up in something for years. It isn’t a bunch of money, and I have barely made $50 in 4 years, I am wondering it if it better to just have in my savings in case it is needed, or if I should throw it into my car loan to get that paid off quicker and save interest there. So many ideas, but yes, I don’t think the return rate for a CD makes the investment (and tying the money up) is worth it - at least through credit unions.

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#6

Thank you! I found out it “matures” in August, so at least I have time to figure out how to move the money. I would assume the back could help me with that…

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#7

Have you run across any “investing order” type guides? There’s one that I see on the MMM forum that I like, and base my investment plan on:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153
When it talks about “treasury note yield”, that’s like 2%, so just add that to the other number. (5+2=7%, for example).

WHAT

  1. Establish an emergency fund to your satisfaction

  2. Contribute to 401k up to any company match

  3. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.

  4. Max HSA

  5. Max Roth or Traditional IRA based on income level

  6. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)

  7. Fund mega backdoor Roth if applicable

  8. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.

  9. Invest in a taxable account with any extra.

WHY

  1. Give yourself at least enough buffer to avoid worries about bouncing checks

  2. Company match rates are likely the highest percent return you can get on your money

  3. When the guaranteed return is this high, take it.

  4. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.

  5. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between

  6. See #4 for choice of traditional or Roth for 401k

  7. Applicability depends on the rules for the specific 401k

  8. Again, take the risk-free return if high enough

  9. Because earnings, even if taxed, are beneficial

#8

There are several bank accounts that pay interest (not as high as a CD, but not zero). Including online banks, which I’ve never used…

Money put into a Roth is liquid, you can pull out your contribution without penalty (it’s pulling out the gain that triggers a penalty). It may take a day or two to get the money, but that’s usually liquid enough.

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#9

Thank you so much. This is very helpful. I know I can improve my financial literacy but having directions for which way to go and where to start looking is so helpful.

#10

This is so common sense, but I have never thought of putting it down like this. Thank you so much.

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#11

Of course! It was like a lightbulb for me to find a “cheat sheet” like that! Takes so much anxiety and guess work out for me :slight_smile:

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#12

I keep my savings in an online Discover account. The current interest rate is about 1.75% IIRC. It was easy to set up and so far I’ve had no problems. I use this account for my emergency fund, and funds I know I’ll need to pay soon (i.e. property taxes) so they can earn some interest without the risks associated with investing. It’s fairly quick, though not immediate, to move money between Discover and my checking account. I know others use Capital One, though they had some negative reviews which prompted me to go with Discover.

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