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Finance

Want to play it safe? Wheel and deal
with CDs and MMAs instead of stocks


Play the CD market 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 market accounts.

Perhaps you see yourself in one of the categories below:

Emergency-ready: 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.

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Market-timing: The 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.

Short-term CDs 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 MMA.

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. The CD matures in time for your holiday shopping or travel expenses, with the principal intact and having earned an attractive yield.

Are your savings in passbook savings or statement accounts?
Or maybe you're not really sure how CDs and MMAs work?

Check out Bankrate.com's look at how you can compare these savings methods with higher yielding, but also safe, CDs and money market accounts as a first step to earning more on your savings while taking on little or no risk.

Also check out the comparative savings rates between passbooks and statement accounts and CDs and MMAs.

And, as always, Bankrate.com constantly surveys financial institutions to keep track of their rates. You can always use our search engines to find the highest rates on a money market account or a certificate of deposit.

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 and MMAs. 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 and books.

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.

To comment on this story, please e-mail the Bankrate.com editors

 
Related information:
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-- Posted: June 9, 2000

 

 



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