The Unforced Error
Letting Your Money Gather Moss
Worth It: Long-term CDs
Not Worth It: Savings Account
It may be a first in the history of finance: a way to use the fine print to your advantage. Perhaps you’re looking to buy a house in the next few years, or maybe you’re saving up for that much-needed sabbatical in Tahiti. While the stock market may look like a good investment for the long run, stocks feel a little risky when it comes to funds you may need to tap in the near future. The alternatives, however, are ugly. Banks are paying why-even-bother levels of interest, so your cash is dead money in a savings account. Park $10,000 in a bank’s average money market for a year and you’ll earn a whopping $16.
The solution, courtesy of Colorado financial adviser Allan Roth: Take that $10K and buy a five- or seven-year certificate of deposit (CD) with a small early-withdrawal penalty. Roth recommends Ally Bank’s five-year CD, which yields 1.53%. At first glance, you might reject it, seeing that your money will be locked up until 2018. But, in fact, you can pull your money out early and pay just a small penalty (two months’ interest). So even if you cut and run after a year, you’ll still pocket $125. Hold the CD until maturity, and you’ll earn nearly $800.
Even if you don’t follow these strategies exactly, you’ll build wealth faster just by heeding these lessons: Don’t follow the herd into a “hot” investment; control what you can, costwise; and don’t try to outsmart the market. And if a free lunch does come along—eat.
Jack Otter is editor of barrons.com and the author of Worth It...Not Worth It? Simple & Profitable Answers to Life's Tough Financial Questions.