is a CD right for me or should I stick to a savings account?

[laterrainfot]

I’m a bit uneducated about investing so apologies in advance.

I currently have a savings account where I deposit around $2000 a month and plan to do so for another 10 months or so. the interest rate is 4.26% compounded daily and APY is 4.35%. however, someone told me it may be better to invest in a 6 month CD, but looking at things online, I’m not so sure. it seems like I wouldn’t be able to get a much better interest rate on a CD and I wouldn’t want to deposit a full $2000 a month into a CD since I’d want to save some money for emergencies. additionally, I don’t believe interest on a CD is compounded daily, and as I’m adding money every 2 weeks, I’d ideally want something that compounds at least monthly.

I can only do a 6 month CD because I plan to use some of the money in 10-12 months to get my own place.

 

[mosfet]

@laterrainfot i have looked at this as well. IMO the yields on CDs aren't any better to make it worth locking up the money, unless you really think interest rates are coming down and you can get a cd that isn't callable

a potential alternative is treasuries. I bought a bunch maturing at the end of February. yield is just under 5.4%.

 

[laterrainfot]

@mosfet do you know if CDs can lose value? one website said they can but it said if you’re ok with keeping your money in the CD for 1-2 years, the value should go back up but I don’t have 1-2 years

 

[mosfet]

@laterrainfot If rates were to go up, arguably your CD is worth less if you try to sell it, but otherwise it's like a bond just hold it to maturity and then you get all your principal + interest

 

[slow]

@laterrainfot I doubt it’s compounded daily, it’s probably credited daily and compounded monthly.

APY is APY, the “compounded daily” is irrelevant.

CDs are good if you don’t need the money for that amount of time, and they’re pretty much risk free.

 

[laterrainfot]

@slow it is compounded daily and is credited monthly

 

[slow]

@laterrainfot That sounds like Discover’s pitch…. And as much as I like discover, that’s pure marketing/BS.

Something can only compound when the interest makes interest, and if the interest is only in your account at the end of the month….. it’s monthly

 

[laterrainfot]

@slow what if I’m adding money twice a month though? so like for half the month it is a certain amount and interest is calculated and then suddenly one day there is $1000 more and it remains the new higher amount for the second half of the month. would monthly compound take that into account or would it calculate interest based on what was in my account on the 1st of the month?

 

[slow]

@laterrainfot As soon as the money is in your account it starts earning interest. That interest is paid at the end of the month, which will then start earning more interest. Discover is a great bank, but I’m fairly certain it’s not compounded daily because interest isn’t paid daily.

Unless they give you interest on the interest not paid…. But I doubt it

 

[radualex]

@laterrainfot Average daily balance is what they’ll calculate your interest at.

 

[sensesfailed]

@laterrainfot If you can get a higher return and you don't need the money for 6 months, then a CD will make you more money without a downside. You may have to fund your CD up front. So if you currently have $10k maybe you buy a CD with that and then keep depositing to your savings account the $2k monthly to rebuild your emergency fund and still earn some interest.

TLDR The only downside of a CD compared to a savings account is the ability to access it, for which they compensate you with a higher rate of return. If you don't need to access it, you should probably choose whichever pays the higher return.

 

[laterrainfot]

@sensesfailed okay that makes sense. I think I might actually do this

 

[thesarabecker]

@laterrainfot Don’t do the CD if you plan to throw 2k in every month. You won’t be able to contribute to a CD. So even if you’re getting a slightly better rate you’re only earning on what you initially invested. Whereas with the savings account you can easily slap 2k in and still get your 4.35% on a higher value of money and it’s liquid.

If you’re thinking between savings and CD, consider a money market. Still liquid and some banks will give you a better rate if you have more money.

 

[erman]

@laterrainfot You can get HYSA at 5% or higher right now. I would stick to that and just keep adding 2K every month.

 

[teejay79]

@laterrainfot You could also look at buying tbills at auction or even in secondary market. 6 month tbills are around 5.2% and they are state tax exempt if your tax has a high tax could be helpful. NY/CT/CA all have pretty high state tax so could be helpful in those places. Not the best option if you want something ultra liquid.

Alternatively you could do something like SGOV/USFR , but the return could go down if there is a drastic reduction in interest rates. Right now sec yields for those two are 5.45 and 5.43. They are also state tax exempt.

Lastly there are MMF at brokers that all should be around 5% or higher. Probably all treasury one would be best option as they are close to yields with state tax exemption. You can also do prime MMF at Fidelity or Schwab, but I don't really feel as comfortable with prime mmf personally.

If it were me I would decide portion i would want for emergencies, and put that in a MMF and then you could put the rest in either sgov/usfr or a tbill thats what i would do personally.

 

[nothinges]

@laterrainfot CDs are for mid-term savings (like 3-5 years). You're "locking in" a rate in case interest rates go down. There is interest rate risk with this plan (ie, you'll make less if interest rates go up).

If you're looking to buy a house in a year, a HYSA or MMF is your best bet.

Don't make decisions on a fraction of a percent. It doesn't impact your purchasing power.

 

[laterrainfot]

@nothinges oh okay thanks I may just stick to the savings account then.

also I’m not looking to buy, just to stop living with my parents and start renting

 

[felixthecat777333]

@laterrainfot Rates will drop this year it’s almost a guarantee.if you want a cd buy now before rates drip

 

[oneworld]

@felixthecat777333 Another option is a growth CD so you have it available if there's a big drop.

 

[amandanahas]

@laterrainfot You can just put it as cash in a Fidelity Brokerage account and get 5% automatically due to the default money market fund SPAXX paying out 5%.