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Financial Planning - Financial planning in general. (Moderated)
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Posted by Elle on February 2, 2008, 6:18 am
How liquid do you want this investment to be? What is your
timeframe for needing it? Will you need it all at once, or
could you divide it into tenths, where one tenth would be
available every month to move around?
The Federal Reserve's benchmark rate today at 3% stands
about where it did in early 2005. To fight inflation, I
think the Fed will start raising it again within nine
months. With interest rates, we could see some kind of
repeat of 2005-2007. See
http://www.federalreserve.gov/releases/h15/data/Monthly/H15_FF_O.txt
In early 2005 I constructed a CD ladder going out seven
years. The longest maturity ones were one-time adjustable,
which I wanted because rates were going up. In the coming
two years+, I did adjust one of these CDs. By about
mid-2006, when the Fed finally stopped raising the benchmark
once a month, the lower maturity CDs (paying 3.7%-3.9%-ish)
were paying way less than money markets (at 5%-ish). Now the
remaining CDs are paying way more than today's new CD
offerings of comparable maturity. The ladder "is working."
The overall yield of the ladder is high compared to
prevailing money market rates. Admittedly from mid-2006 to
mid-2007 I was questioning whether I'd properly researched
interest rates etc. before constructing the ladder in 2005.
This was probably an exercise in 20/20 hindsight. Fact is I
am meeting my goals with this ladder.
Due to (1) radical adjustments to the benchmark rate and (2)
some banks needing money on deposit to deal with delinquent
mortgages, and some not, CDs seem to me to be adjusting
somewhat erratically these days, very much like early 2005.
Today, with this experience under my belt, and if forced to
construct a brand new CD ladder, I would wait at least two
months from now for things to settle down (that is, stick
with your low paying Schwab money market account). Or in the
alternative, I would construct a ladder going out maybe two
to three years, with rungs six months apart, using
bankrate.com as a guide to what's a good rate. When the
benchmark rate was back up to around 4.5% or so, and
assuming my needs were still consistent with laddering, I'd
build a full-blown five year ladder.
Two cents and nothing more. Mostly, use your best
information, live within your means, and don't beat yourself
up if you don't get "the very best" deal with CDs and money
market. Chances are with a little effort you will do better
than most. The few who "beat" your returns with CDs were
simply lucky in their speculation.
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