How to invest money that you cannot risk or make illiquid

Oct 24, 2006 by

In the previous post, one of the mturkers mentioned that I had a savings account paying 5.50% APY. What I forgot to mention in the post was that when I asked the mturkers for investment advice, I told them that my best alternative to investment was keeping my money in a bank account paying 5.50% APY. Currently, there are several banks offering great interest rates on savings accounts, as long as the savings accounts are completely handled online, and linked to “terrestrial” checking accounts.

Here are three possible banks you could use:
*eloan.com (Banco Popular): 5.50% APY for savings accounts
*emigrantdirect.com: 5.05% APY savings accounts
*ingdirect.com: 4.40% APY for savings accounts
(Information current as of October 24th, 2006.)

With these types of accounts, you can usually withdraw your money into your checking account within about five days. Although the savings rates are subject to change, there is no chance you will lose your money in these accounts, as you are not taking on any risk. Also, these banks are FDIC insured for accounts containing up to $100,000. At the moment, interest rates are rising, so it is likely that any changes in the rates will be to your benefit.

As interest rates are rapidly rising, it does not make sense to invest this sort of money in CDs. The six and eighteen month CD rates at eLoan for $10,000 and up are 5.60% APY and 5.75% APY respectively. EmigrantDirect advertises CDs with a minimum investment of $1,000 paying 5.20% APY for a term of six months to ten years. ING Direct is offering 5.00% APY on both six and eighteen month CDs. As you can see, the only one of these CD rates that beats eLoan’s savings account’s interest rate is the eLoan CD. Nonetheless, as interest rates are rising, I think that it is highly likely that a bank will offer a savings account with greater than 5.75% APY in the not-too-distant future. Besides, for the extra .25% APY from the eighteen month CD, you lose liquidity. Assuming that you made you placed $10,000 in a savings account at 5.50% APY for eighteen months, and $10,000 in a CD at 5.75% APY for eighteen months, you would end up with $10,835 in the savings account, and $10,872 from the CD. Is it really worth losing liquidity and missing out on possible substantial interest rate increases for a lowly $37/10,000? I think not.

3 Comments

  1. Marlena Bushway

    I must say that you make a valid point here. Even though you can not touch the CD within the term listed that you signed for (18 months, 60 months, etc.) you will be making more money, as you stated in your blog. If you do not plan on touching the money at all for the 18 months, it would be wise. However, if you have a contract for 18 months and in 6 months the interest rates on CD’s go up, you miss out on that increase. With savings accounts, you do not miss out on the increase at all and you can take the money out at any time. This makes more sense, even if you can make that $38.00 more with the CD is it smart to miss out on the increasing interest rates? No!

  2. Have you heard of Prosper.com? Given the themes of your blog (social investing and finance), I was surprised that you hadn’t mentioned it as an investment vehicle. You might want to check it out as an alternative to stocks, savings accounts, and CDs. I signed up in February, just after they went live, and I have invested several thousand dollars so far. I lend it in $50 increments to borrowers and Prosper.com handles all the servicing and collections of the loans. So far I’m getting over a 20% return. You might want to check it out!

  3. Emily

    Thank you so much for this information. As someone who has only just begun to invest I am not able to seek out risky opportunities. Though they may provide a more substantial return I can’t stomach the risk of losing the small amount I have to invest. This advice has enabled me to ‘get off the beaten path’ in my search for high paying accounts while allowing me to remain comfortable that I will be able to access my money if an emergency comes up. With so much advice targeting those who don’t suffer from the worries of how to pay for car repairs or other emergencies this info is realistic advice for those of us who have to think of those things when tying up even small amounts of money.

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