Author Topic: How big of a mistake did I make by putting my money in a CD?  (Read 7840 times)

xclonexclonex

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How big of a mistake did I make by putting my money in a CD?
« on: February 23, 2015, 11:01:30 AM »
Hello everyone,

I have a question about my finances, and I would like your opinion.

Here is my current situation -

Non-American citizen, living in America and I intend to settle here.
Age - 32
Income - $73,000/year
Marital status - married, no kids. Wife not working
Dent - none
Current savings situation (this is all the money I have) -

401k - $6,847.29
Checking - $4.95
Savings - $95.44
Checking - $2,079.96
Checking 002 - $200.00
Savings - $1,000.45
Online Savings - $300.24 (0.90% interest. Will close this soon)
CD - $96,425.11 (2.30% return. Set to mature in May 2019)
Online Savings - $23,938.29 (1% return. saving for a down payment on a house)
Vanguard Roth IRA - $1,004.39
Savings - $429.44

I realize I have 5 savings accounts and I am working consolidating them.

I was not sure about investing, and frankly that idea scared me, so I stayed away from it. I thought the best way to increase wealth is to spend as less as I possibly can and stock away the left over money in a savings account. I did this for a while, and then I realized that a CD would offer much better returns (in comparison). I had stock piled $95000, with which I opened a 5 year CD offering 2.30% return.

I now realize the power of investing. So my question is, should leave my money in CD or should I break the contract and start investing with it?

Also, how big of a screw up is this? Did I make a colossal mistake? If so, what can I do to rectify this?

Thanks for your input.
« Last Edit: February 23, 2015, 12:36:04 PM by xclonexclonex »

Chrissy

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #1 on: February 23, 2015, 11:11:04 AM »
If you break the CD you lose the interest, but you're only one year into it, so I'd break it.  However, is there any additional penalty to break the CD?  If so, how much?

No, it's not a colossal mistake.  You're young, you realized the mistake quickly, and any penalty is probably minor.

johnny847

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #2 on: February 23, 2015, 11:36:03 AM »
As Chrissy said, most CDs are breakable if you give up a couple months interest. Check the terms.

Also, please don't carry out money amounts to the third decimal place, it's just confusing. It almost makes me think you're using decimals and commas in the convention in some European countries where a comma denotes the decimal point and a period is used to separate sets of three digits (is this actually what you're doing? I'm thinking no because if that were the case, then your income would be just $73, which doesn't make any sense). It's even more confusing when you actually have a digit in the thousandths place, as in your savings of $429.445. How exactly do you have half a cent?

Another Reader

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #3 on: February 23, 2015, 12:31:10 PM »
I'm also having trouble figuring out how much money you have because of the commas and decimals.

I can understand why someone new to this country might take the conservative, insured savings approach to money.  Lots of countries don't offer savings security and the markets are often very risky.

However, whether or not a CD that has four more years to run is a mistake depends on what you intend to do with the money.  You mentioned saving for a house.  Do you know when you are going to buy this house?  Do you have an idea of how much it will cost and how much down payment you will need?  If the purchase is a few years out and you will need a similar amount of money or more to put down, then in your shoes I would leave this money where it is and designate it as the house fund.

If you do that, you can redirect your other savings into cash reserves and investments.  At $73,000 gross income for the family, you are probably not paying a lot in taxes.  I would probably put as much as I could in two Roth IRA's, one for you and one for your wife.  That money will grow tax free until you need it in retirement.  You are still eligible to contribute for 2014.  I would also bump up the 401k at least to the point you get any match offered by your company.  If any money is left over, I would spread it out among taxable savings, taxable investments, and your 401k.

Is your wife planning to work at some point?  Her income can be used to beef up the savings and investment accounts as well, and you can strategically reduce taxes by contributing to her 401k if she has one available.

Congratulations on not having any debt.  That puts you in a strong position to invest for the future starting today.

I'm a red panda

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #4 on: February 23, 2015, 01:08:59 PM »
There are certainly much worse mistakes that could be made than buying a CD. It's not like you "invested" in a sports car or something.
Some people are conservative in their savings strategy. Your money is guaranteed in a CD, and it is slightly better than socking it away in a savings account. 

I'd just make different plans moving forward.

MrFrugalChicago

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #5 on: February 23, 2015, 01:13:41 PM »
At some point, inflation is going to eat more of your money per year than you make in CD interest. So you will lose money every year.

Understand investing can be scary. But not putting your work for you means inflation is slowly kicking your butt. You won't lose all your money in 1 stock market crash, but it will dwindle away over 20 years.

I would suggest getting better educated on investing, then breaking up CDs. At current rates, CDs are pretty useless. i.e. online savings accounts are 0.9% range, same or better than short term CDs. And long term CDs don't even match inflation, so you lose money for having your money tied away for multiple years.

xclonexclonex

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #6 on: February 23, 2015, 02:42:23 PM »
Thank you all for your replies. I fixed the problems with decimals. That was my mistake. Sorry about that.

Quote
Do you know when you are going to buy this house?  Do you have an idea of how much it will cost and how much down payment you will need? 

I plan to buy this house and move in by July of this year. My goal is to save at least $30,000, which I think I can manage. I am looking for houses within $150,000, and I think I can find some decent ones. When you talk about payment, are you referring to monthly payments? If so, I do not know how much I am going to need. I am hoping it would be under $1000.

Is it recommended that I break the CD and put in a lot more for the down payment of the house?

Quote
I would probably put as much as I could in two Roth IRA's, one for you and one for your wife.

Can I open a Roth IRA for my wife even if she is not currently employed?

Quote
I would also bump up the 401k at least to the point you get any match offered by your company.

Unfortunately, I do not have a company match for 401k, but they do contribute a part of my bonus to that account. I am not making any monthly contribution to it, but I will once I am through with buying the house. Right now, I am saving every penny for the down payment.

Quote
Is your wife planning to work at some point?

She is planning to work. She has some mental issues she needs to deal with. I am not forcing her to start working or anything. I am happy to let her take her time. I do worry about what she is going to do if I am not around though...hopefully she will learn to become independent.

Thanks for all your input, once again!

johnny847

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #7 on: February 23, 2015, 03:08:55 PM »
Unfortunately, I do not have a company match for 401k, but they do contribute a part of my bonus to that account. I am not making any monthly contribution to it, but I will once I am through with buying the house. Right now, I am saving every penny for the down payment.
In that case, it is my opinion that you cannot afford to buy a house at this juncture.

beltim

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #8 on: February 23, 2015, 03:12:52 PM »
Unfortunately, I do not have a company match for 401k, but they do contribute a part of my bonus to that account. I am not making any monthly contribution to it, but I will once I am through with buying the house. Right now, I am saving every penny for the down payment.
In that case, it is my opinion that you cannot afford to buy a house at this juncture.

Are you serious?  You think that someone with a $73k income and $124k in liquid assets can't afford to buy a $150k home.  That's insane.

xclonexclonex

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #9 on: February 23, 2015, 03:17:09 PM »
Unfortunately, I do not have a company match for 401k, but they do contribute a part of my bonus to that account. I am not making any monthly contribution to it, but I will once I am through with buying the house. Right now, I am saving every penny for the down payment.
In that case, it is my opinion that you cannot afford to buy a house at this juncture.

May I ask why? I mean I am fairly certain I would qualify for a loan, and I understand that I am not purchasing the house outright at that point. Do you believe that I shouldn't be signing up for a mortgage?

johnny847

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #10 on: February 23, 2015, 03:31:26 PM »
Unfortunately, I do not have a company match for 401k, but they do contribute a part of my bonus to that account. I am not making any monthly contribution to it, but I will once I am through with buying the house. Right now, I am saving every penny for the down payment.
In that case, it is my opinion that you cannot afford to buy a house at this juncture.

May I ask why? I mean I am fairly certain I would qualify for a loan, and I understand that I am not purchasing the house outright at that point. Do you believe that I shouldn't be signing up for a mortgage?
You're saving absolutely zero for retirement at the moment and have virtually nothing in retirement accounts (though yes, you have about $124k in liquid assets). A primary home is not an investment. It is a place to live (unless you plan to rent out a room or something, which you did not mention). In retirement, owning a home will prevent you from having to pay rent (though you will have to pay for maintenance, of course). But nothing more.

I did not mean you literally cannot afford to buy a house at the moment. Clearly from an asset and cash flow stand point you can. I mean in the context of also saving for FI, you can't. All of your liquid non retirement assets are uninvested (well ok, you have a CD. But you're getting pretty close to a zero real return on it). And you have only a mere $1k in a retirement account.

I should have used a better choice of words - not being able to afford to buy a home right now is not the point I was trying to make. My bigger point is that you have put almost no thought into retirement/FI, but you want to buy a house. I think planning your retirement/FI is more important than trying to buy a house. After all, all buying a home does is eliminate an expense in FIRE. It doesn't in itself lead to FIRE.

I recommend figuring out your investment plans first. Then, revisit your plans to buy a home.

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #11 on: February 23, 2015, 03:44:12 PM »
OK, now we have a better picture of your finances.  In your shoes, I would break the CD and take the interest hit.  You can open a spousal IRA for a non-working spouse and one for you.  Up until April 15, you can contribute up to $5,500 for each of you for 2014.  You can also get a head start for 2015 and contribute up to $5,500 for each of you.  That's a total of $22,000 in retirement savings.

You may want to look at your 401k and start contributing ASAP.  You already have more than enough for a down payment tied up in that CD.  For 2015, you can contribute up to $18,000.  That would give you up to $40,000 in tax deferred or tax free retirement savings by the end of 2015.

Have you talked to a real estate lender or mortgage broker yet?  Since you have no debt, it may be difficult for you to get a mortgage.  You may not have a credit score if you haven't borrowed money.  In your shoes, I would start the approval process now.  You want to be pre-approved before you go shopping for a house, especially if you are buying in a competitive market.

Because you are concerned about what would happen to your wife if something happened to you, I would look into some inexpensive term life insurance.  You may already have some through work.  At your age, term life is inexpensive if you are in good health.

I would put the remainder in savings for now until I bought the house.  Then I would learn everything I could about investing and put the remaining money to work, while keeping a healthy emergency fund.

Jacana

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #12 on: February 23, 2015, 05:09:56 PM »
If you do decide to buy a house... For breaking the CD, try calling the bank and asking what the penalty would be for breaking it, specifying that you want to use the money for the down payment on a house earlier than you anticipated. The bank may be more willing to work with you for that reason, since you aren't just breaking it to reinvest at a better rate. Ally was very nice when we called to break ours for an unexpected new job/move/new house, and the penalty was only 60 days interest.

Then you can use whatever portion you choose toward a house, and the remainder to fund retirement accounts or return to investments.

xclonexclonex

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #13 on: February 23, 2015, 09:14:17 PM »
Thank you all for your replies

Quote
A primary home is not an investment. It is a place to live (unless you plan to rent out a room or something, which you did not mention). In retirement, owning a home will prevent you from having to pay rent (though you will have to pay for maintenance, of course). But nothing more.

I understand what you are saying. The reason I want to buy a home is because I am told interest rates are very competitive, and I see myself living in this town for a very long time, if alll goes according to plan. I figured if I paid off the house aggressively, then I will not have to worry about paying rent

Quote
And you have only a mere $1k in a retirement account.

I am looking to fix that. I really need to do a lot more research on this subject. I understand that there are limits on how much I can put into retirement accounts, so if I happen to have more money that I can invest, I have to figure out how to accomplish that.

Also I have the 401k account which has about $7k in it.

Quote
My bigger point is that you have put almost no thought into retirement/FI, but you want to buy a house. I think planning your retirement/FI is more important than trying to buy a house.

I see your point. I made a mistake in the way I handled my money. I was far too conservative.

Quote
I recommend figuring out your investment plans first. Then, revisit your plans to buy a home.

This seems to be like the smart thing to do. I need to spend more time trying to understand how investment works, and how I can acquire knowledge to make decisions.

Quote
For breaking the CD, try calling the bank and asking what the penalty would be for breaking it, specifying that you want to use the money for the down payment on a house earlier than you anticipated.

I will do that tomorrow. I will find out what the penalty is, and if it is a good idea to break it.

Now, seeing as how I did not invest a lot of money, how bad of a situation am I in? I understand now that retirement in America works a lot differently compared to other countries.

Thanks for your time.

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #14 on: February 24, 2015, 06:50:29 AM »
Speaking of going according to plan; what is your immigration status? H1B or green card? Is your "plan" to get a green card? Because that is not guarantied, and could take a long time to finalize. This should be factored into your house purchase decision. I was stuck in "maybe,  probably, but not sure" limbo for my green card for a while, while I was getting closer to my H1B expiration.. It's not the end of the world if you'd have to sell a house and go home, but could be a pain.

Also; why not keep enough for a down payment in the CD, and invest anything else? You already have what you need for the house so why not focus on increasing your 401k/IRAs now.

Sibley

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #15 on: February 24, 2015, 08:04:08 AM »
Another question that I didn't see above. It looks like you have 3 checking accounts, in addition to the multiple savings accounts you addressed. Why? Consider consolidating those as well.

In my experience, it's much easier if you keep things simple, particularly when you're still getting comfortable with the whole topic of finances and investing. As your knowledge and confidence grow, you will naturally develop a system that works for you.

xclonexclonex

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #16 on: February 24, 2015, 03:23:34 PM »
Speaking of going according to plan; what is your immigration status? H1B or green card? Is your "plan" to get a green card? Because that is not guarantied, and could take a long time to finalize. This should be factored into your house purchase decision. I was stuck in "maybe,  probably, but not sure" limbo for my green card for a while, while I was getting closer to my H1B expiration.. It's not the end of the world if you'd have to sell a house and go home, but could be a pain.

Also; why not keep enough for a down payment in the CD, and invest anything else? You already have what you need for the house so why not focus on increasing your 401k/IRAs now.

Hello,

I am a permanent resident of United States - a green card holder if you will. So is my wife.

Regarding investing - I have a Roth IRA account, but I understand that there are restrictions on how much I can contribute to it per year, so if I were to exceed the limit, I am not sure what to do.

Also, my 401k is through Fidelity, and it appears that their expense ratios are higher compared to Vanguard, so I am not sure what to do about that. Is there a way I can transfer my 401k from Fidelity to Vanguard?

Quote
Another question that I didn't see above. It looks like you have 3 checking accounts, in addition to the multiple savings accounts you addressed. Why? Consider consolidating those as well.

Regarding my checking account, yes, I definitely plan to consolidate them too. I want to have one checking account, and two savings accounts (the one at my local bank and the other is the "high" interest account)

James

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #17 on: February 24, 2015, 03:51:41 PM »
Saving money is never a "mistake", you did well!!!


You lost some significant earnings on that saved money, but that is much better than having spent it. Work on finding a way to invest it, and it will start working for you. It could go down at times, so you are correct that investing money does involve some risk. But placed in index funds you will enjoy much higher gains over time, and have much more when needed in the future.

xclonexclonex

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #18 on: February 25, 2015, 05:35:20 AM »
Thank you. I lost our earnings over a 4 year period, which makes me sad, but at least I am not in debt, and I live in a low cost city, which is really all I can ask for at this point.

I am going to look into low cost index funds on Vanguard, and start making more contributions.

Thanks for your advice!

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #19 on: February 25, 2015, 08:53:29 PM »
Also, my 401k is through Fidelity, and it appears that their expense ratios are higher compared to Vanguard, so I am not sure what to do about that. Is there a way I can transfer my 401k from Fidelity to Vanguard?

401ks can't be moved, unless you can convince your employer to change providers. When you change jobs you have the option to roll your 401k into an IRA or into the new employer's 401k.

Fidelity has some perfectly good low expense ratio investment options. I don't know what's available in your 401k, but look for Fidelity's "Spartan" line of mutual funds. Fidelity also offers commission-free trading of iShares ETFs, some of which are low expense ratio index funds.


Bob W

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Re: How big of a mistake did I make by putting my money in a CD?
« Reply #20 on: February 26, 2015, 08:28:03 AM »
Not a super mistake. 

I'm not a banker but the "substantial penalty for early withdrawal" is stated mainly to keep people locked in.  The penalty is often miniscule.  Check with your bank but it is usually some ratio of the interest for a short period.   It never effects the principal.