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Ask Money

CDs?

Chris Farrell May 16, 2008

I want to apologize. I am in the communications capital of the world–New York City–but I had all kinds of problems hooking into the Internet, at the hotel and elsewhere. So, here is a belated post from a weary road warrior.

Question: We always hear that Americans aren’t saving enough. I currently have a sizable amount invested in two CD’s earning 4.9% interest. These CD’s will come due in June and I notice the current rates at the bank are from 2.5 to 3.2% for terms less than 2 years. With inflation running well above 3%, what incentive do I have for putting these funds back into a CD where they will tread water at best or more likely lose value? I am also invested in stocks, but wonder what should I do with the money from the CD’s? Buy more stock, bonds, utilities, or head for Las Vegas? Frank, Kingsport, TN

Answer: Well, at least heading to Las Vegas would be fun.

You’re absolutely right: Savers aren’t getting paid much interest for their money these days. Still, the big question is how do you look at this money? Is it an anchor, part of your overall safety net? To put it somewhat differently, how much risk are you willing to take with the money?

If it’s an anchor, then I would keep the investment money safe, perhaps in a shorter-term CD or a conservatively run money market mutual fund. Yes, you won’t make much interest, but you won’t lose much–if at all–to inflation. The money will be there if you need it in an emergency or if an opportunity comes along. You could take a bit more risk and go into a low-fee broad-based high-quality short-term bond fund.

The other options you mentioned are riskier. Stocks are riskier than CDs. It all depends on what role you see this money playing in your overall portfolio.

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