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3 Ways to Beat the Return of a CD
Posted By timparker On 09/28/2011 @ 2:41 pm In Personal Finance | 7 Comments
The challenge is out there. Financial writers love to trash the CD and the savings account but in an economy that is taking people’s wealth faster than our credit cards, we can’t put our money in to just anything. The CD and the savings account are safe but they won’t make you any money. Still, though, if we’re going to snub the CD, shouldn’t we give our readers some alternatives? Today we’re answering the call. Here are three ways to invest your money that will make you more money than a 3 year CD.
First, the challenger. The certificate of deposit has safety behind it. Even if the bank that holds your CD were to be shut down, the FDIC will make sure you get every dime of your money back. Two of our three alternatives are equally safe because they aren’t investments at all. They carry no risk. The highest yielding CD we found at the time of this article had a yield of 1.53% so all of our options will yield at least 1.53%. Here we go!
Instead of putting your money in CD, pay off your debt. Maybe not your mortgage but all of those credit card bills, car loan, student loans that have a low balance, and the loan you have for the big TV in the living room. It would be better to pay off your debts before investing because that is an investment that has no risk and pays very well. Chances are these loans are at least 6% and probably considerably higher so put us down for our first score.
If you are planning to stay in your home for a long period of time and you haven’t refinanced since 2008, you could save, on average $2,000 per year. The average mortgage rate in August of 2008 was 7.00%. Now, you could get a mortgage for close to 4%. That’s much more than 1.53% even with the mortgage fees so we’ll take another point. Of course there’s a chance that you won’t qualify for a refinance but if President Obama has his way, a lot of people will be able to refinance their mortgage even if they have bad credit or an upside-down mortgage.
If you’re not a stock picker, you may not be comfortable with this option but consider asking for help from a qualified fee based or fee only advisor in your area. Some stocks don’t have large price movements even in bad market conditions and as a result, pay you a dividend to hold them but for stocks held for the long term, you will see a rise in the stock price along with the dividend payment. A stock like Verizon or AT&T pay dividends of more than 5% as of this writing. It’s not hard to find high quality companies that pay dividends well over 1.53%. Ask your financial advisor to set a tight stop. A stop causes a stock to automatically sell if it drops a certain percentage in value. A stock can have almost no risk if you set the stop very close to your purchase price.
Although we’ll claim victory on this challenge, remember that the first rule of investing is, don’t lose money. It’s better to put your money in a low yielding CD that makes little to nothing than it is to put it in an investment that ends up resulting in a loss. A 0% gain is better than a 1% or more loss. Do with your money what makes you comfortable and resist the peer pressure from people like us who think you should do more.
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