I have to meet a few of Mrs. RB40′s conditions before I can quit my corporate job. One of them is for us to save $50,000 in cash. (I negotiated down from 100k because I really think that is way too much cash.) We’ve been working on it for a while and we finally made it this month!
We have been diligently socking away my paycheck every month into the ING Orange Savings account. The interest rate on the Orange Savings account recently dropped to .8%. We’ll get $400 of interest per year if we keep the money at ING. This is quite a bit lower than inflation and I thought we should find a better alternative.
The main criteria we have for this $50,000 is to keep it liquid. If we need to use some of this, we need to be able to get it in a week at the most. With this criteria, we eliminated pretty much all investments. Here are some other choices.
- Stash it under the mattress – not a good idea. The bed will be lumpy and uncomfortable. Nobody will be happy with that.
- Keep it at ING Orange Saving. This is not a bad choice for a saving account, but the interest rate is just not good enough for a big stash. This option gives the maximum flexibility. *Update* CIT Saving account has 0.25% better interest rate than ING if you deposit more than $25,000. This is where I’ll stash the $50,000 for now.
- Build a CD ladder. This is probably the safest way to stash the money and get a bit more interest than the saving account.
- I can open a saving account in Thailand and get 2.5% on 6 month CD. Although, the currency exchange fee will cut into the gain and the exchange rate is not great at this time. Perhaps I need to look into this further.
- Readers suggested option – I-bonds @ 3% interest rate and a pretty low penalty (3 months interest.)
- Any suggestions? Keep in mind, this amount cannot go down and needs to be liquid, so no gold, stock, or bonds.
I’m leaning toward building a CD ladder.
The classic way to build a CD ladder is to break up $50,000 in to 5 pieces. Then you use $10,000 to buy 1 year CD, another $10,000 to buy 2 years CD, and so on. After one year, then you can collect the money from the 1 year CD and use that to buy a 5 year CD. Eventually, you will maximize the interest rate and have penalty free access to some of your money every year.
CD rates are also very low at this point, but it’s better than 0.8%. From my research, the Pentagon Federal Credit Union seems to be the way to go. Their rates are very competitive and they service the military, homeland security, and other related government institutions. If you are in the military or are a employee of one of these services, then you are eligible to join for free. If not, then you can sign up with Voices For America’s Troops for a one time $15 fee to be eligible.
Here are the current CD rates at PenFed and a few other banks.
|PenFed||my CU||ING||Ally Bank|
I was considering Ally Bank before I found PenFed and may still go with them, but PenFed’s rate is better at this point. My plan is to use $30,000 to buy the 3, 4, and 5 year CDs and keep $20,000 in the Orange Savings account. We want to keep $20k very accessible for now, just in case. Then next year, we’ll buy another 5 year CD.
The last thing we need to examine is the early withdrawal penalty. For a 5 year CD, the early withdrawal penalty at PenFed is up to 365 days of interest. This is a pretty big penalty, but at least it won’t eat into the principle. If we redeem the CD before 365 days from the issue date, then we will only lose the accrued interest. Please check PenFed for the latest terms.
I researched PenFed on the internet and they seem to be OK. They are the 2nd largest credit union in the US and serve about a million people. There are some complaints about the customer service, but I think if we are just buying CDs and do our banking online, we shouldn’t have much problems.
Do you have or know anyone with a PenFed account? How do you like them? If you have a good alternative to a CD ladder, then please share your plan. What would you do with $50,000?
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