Any time you need a safe harbor for your
money, or a respite from the hurly-burly world of the stock
market, CDs and money market accounts beckon.
There's a tendency to dismiss them as
low earners compared to the stock market, but you don't have
to treat these safe investments as just a well-lighted parking
place for idle cash. Instead, why not consider being active
with them: Play the CD market as you would the stock market.
Some very basic moves will reward you
with excellent returns. The following strategies can help
people with varying cash needs and savings goals obtain optimum
yields on their cash via certificates of deposit and money
Perhaps you see yourself in one of the
Everyone should have an emergency fund for unplanned expenses.
Rather than keeping this idle cash in low-yielding checking
or savings accounts, why not pursue a high-yielding money
market account? The money is FDIC insured and completely liquid,
meaning the money can be accessed at any time. Money
market accounts provide check-writing capabilities, making
them a perfect place to stash cash until it is needed, earning
an attractive yield in the interim, and without having to
transfer the funds to a different account when needed. This
is an option available to many people as an emergency fund.
investor looking to keep money in cash, earn an attractive
yield in the meantime and maintain the liquidity necessary
to jump back into the stock market at a time he feels more
appropriate is a candidate for a high-yielding money market
account. Such accounts are FDIC insured and completely liquid.
Further, these accounts provide check
writing up to a certain number of transactions per month for
those looking to ease back into the market.
provide more-favorable yields, but may not be appropriate
for this type of money user. With a CD, the money is locked
up for a specified time and the investor runs the risk of
not having the funds available when ready to get back in the
market. The penalty for early withdrawal involves forfeiting
interest earned, more than negating any yield benefit from
a CD. Best advice is to stick with a high-yielding
Starting a holiday
fund: Perhaps you recently received a bonus check or tax-refund
check. One alternative to going into debt during your next
holiday season is to take the current cash windfall and park
it in a six-month CD. The funds are FDIC insured, and locking
the funds in a CD alleviates the temptation to spend the money.
matures in time for your holiday shopping or travel expenses,
with the principal intact and having earned an attractive
Boosting a vacation
fund: Perhaps you already have a stash of cash accumulated
for a vacation in the coming months. Preserving that capital
and earning a competitive yield in the interim can be accomplished
through a short-term CD
or high-yielding MMA.
If the funds are needed sooner than three
months from now, the high-yielding
MMA provides an attractive yield and full liquidity whenever
the funds are needed.
Diversifying a portfolio:
An investor looking to diversify an otherwise stock-heavy
portfolio across other asset classes is a prime candidate
for the safety, security and high yields of CDs
Liquid cash should be kept in a high-yielding MMA.
Long-term cash can be invested in CDs
to maximize yield, providing the diversifying investor a method
of locking in this return for the next five years. These funds
are FDIC insured. Investors subject to state income tax may
wish to discuss the tax implications of the various alternatives
with a tax adviser.
College fund: For parents with
college age or high school age children, CDs
provide an excellent method of preserving capital in the years
approaching tuition payments, while still earning attractive
yields. The funds are also FDIC insured. For example, a parent
with a son or daughter entering 11th grade would benefit by
putting the funds in a laddered portfolio of CDs with maturities
of two, three, four and five years. Funds would mature at
the beginning of each college year for expenses such as tuition
Another possibility is laddering the
portfolio to have funds mature every six months (maturities
of two years, two and a half years, three years, etc.) coinciding
with expenses due each semester.
Retiring in style:
The ideal setup for retirees is a laddered portfolio of five-year
CDs, with the amount of time between CDs depending upon how
often the cash influx is needed (monthly, quarterly, every
six months, etc). CDs
having matured can be kept in a high-yielding
MMA until the cash is needed, prolonging the period of
time the maximum yield is earned.
Having a laddered portfolio of five-year
CDs earns higher yields than shorter-term CDs. The idea is
to keep cash that is not needed immediately earning the highest
possible yield. The tricky part is getting to the point of
a laddered portfolio of CDs.
Those approaching retirement should begin
setting this up now, with the first funds scheduled to mature
shortly after retirement. The remaining funds should be invested
to mature as needed, keeping in mind that only a portion of
the entire portfolio will be needed in the first five years
of retirement. Proper apportionment between CDs, bonds and
equities is appropriate as investors may live 30 years or
more in retirement. Proper asset allocation between capital
preservation and investments that outpace inflation is key.
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-- Posted: June 9, 2000