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Where to Put Your Money in 2007? CDs? Savings Accounts?

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Is 6.25% high enough to lock in your money into a long-term Penfed CD? One important issue is your goal for the money. Is it an emergency fund? Is it intended for a big purchase several years down the road? If you want to keep your money very safe, the high yield savings account would be another option. To keep things simple, let's just compare a CD to a savings account. To pick the best option to earn the most money, you'll have to take a guess about interest rates. See this Bankrate.com article on CD investing in 2007. The experts give some of their opinions about future interest rates.

If the rising rate cycle is over for the next several years, than locking into a high yield CD will likely return more than keeping your money in a savings account. Once the Fed starts to cut rates, the savings account rates will also fall. On the other hand, inflation could lead to higher rates. You may want to try to make predictions based on history. Here are some references for rate history: Intended federal funds rate since 1990 and T-Bill History since 1928. Please leave a link if you find any other good references.

Even if rates do rise over the next few years, a CD could still be the better option. For example, let's say one person purchases a 6.25% APY 3-year Penfed CD and another person puts money into E-LOAN's 5.38% APY savings account. And let's assume rates do rise over the next 3 years. If the E-LOAN savings account rate rises to 7.12% at the end of the third year, the average return for the 3 years would be about 6.25% (average of 5.38% and 7.12%). So in this case, both would end up being about equivalent. So a CD could be a better option even with rising rates when rates don't rise too much.

One important concern would be a case in which rates go way up like they did in the early 80's. In that case, the savings account would come out ahead. But a CD may not be too bad especially if the early withdrawal penalty isn't too severe. The Penfed CDs with terms of 3, 4 and 5 years have a maximum early withdrawal penalty of 180 days of interest. The 7-year CD has 365 days of interest penalty. As an example, if rates jump after 2 years, you may find it worthwhile to break the CD. The loss of interest would turn the 6.25% APY return for those two years into a return of about 4.70% APY.

These are just some considerations that may be helpful in your decision. For more information on Penfed and its 6.25% CDs, please refer to this post. For a list of high yield CDs and savings accounts, please refer to my weekly summary.
Comments
Sree
Sree (anonymous)   |     |   Comment #1
Very interesting analysis, makes a lot of sense..
But PenFed kinda deals are not available for all, so, one should decide up on their currently available optios for this.

I am very much benifitted with this site, my first investment started with the National1St Credit Union deal from this site, and by the end of 2006, I reached my 2006 year financial goal(to earn my house rent from CDs). Now I am going to spend some money in Mutual Funds..
Thanks Bank Guy... I wish the God may give you enough energy, health, good luck in this new year 2007.
Anonymous
Anonymous   |     |   Comment #2
Liquidity has a lot more value than a pitiful 1%
SVG
SVG (anonymous)   |     |   Comment #3
Yield Curve is inverted. Now it has gone into negative. Therefore it is likely that the long-term rates will rise and short-term rates will fall.

- SVG
Anonymous
Anonymous   |     |   Comment #4
"Liquidity has a lot more value than a pitiful 1%"

Well, that depends on whether you have $1,000 or $500,000 invested in a 5-year CD. 1% of 500,000 is an extra 5 large a year x 5 = $25K. Wow, that's pitiful.