Money Rehab with Nicole Lapin - A Safe Investment for Volatile Times

Episode Date: March 21, 2023

We know a safe investment isn't as sexy as a startup with the potential to go to the moon. But say that startup ends up being a... Silicon Valley Bank. Slow and steady doesn't sound so bad now, does it? Listen in for Nicole's picks for a safe investment that won't have your stomach in knots.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. it's time for some money rehab. Lately, it seems like ads for CDs are everywhere. And I mean, certificates of deposit here, not compact discs for you 80s babies out there. If you're wondering what the heck CDs are and if they're worth investing in, you are not alone. CDs, honestly, are, and if they're worth investing in, you are not alone. CDs, honestly both the investing kind and the music kind, have been out of favor for a while now. The financial CDs haven't had any real

banging return rates since before many of us were born. They were earning over 10% in 1984, for instance, and since the music CD got ditched for streaming, the return rate on certificates of deposit have been less than 1%, making them about as useless as a physical CD in a Tesla. Just as vinyl records have made a comeback, though, CDs, the investment vehicles, are coming back along with higher interest rates. And just to be clear, financial CDs and music CDs are unrelated, and one's popularity has nothing to do with the other. But it is an interesting coincidence, right? Anyway, because this is Money Rehab, I'll of course be focusing on the financial CDs. They come in two forms, bank CDs and brokered CDs. Let's talk about bank CDs first. Much like a treasury bond, a CD is a way you lend an

institution money. In this case, you're lending the bank money. Because CDs are loans, they have a fixed interest rate and are under contract for a set amount of time. With interest rates being so low for the last decade, banks have been able to borrow money easily from other sources, and they haven't needed to incentivize CDs. Now that interest rates are up, it is more expensive and more difficult for banks to borrow money, and suddenly it benefits them to offer CDs to their customers. Hence all of those ads you might be seeing saying things like, exceptional CD rates for exceptional customers. CDs come in 3 months, six months, one year, three year, and five year amounts. And since your money will be locked up for that amount of time, the bank has to give you a reason for missing out on other investment opportunities.

And we have a phrase for that, of course. It is called opportunity cost. Ideally, you want the opportunity cost to be lower than the reward of whatever has your money in lockdown. So the interest you make on a CD should be more than what you would make if you invested your money in something else like the stock market or anything your heart desires, NFTs if you want. Because while you need to consider time and rate of return, you also need to remember that you can't withdraw your money early without being hit with some penalties. Usually, this penalty is paying the equivalent of the simple interest on the initial deposit for a period of time ranging from 90 days to 18 months. And again, that's simple interest, so the interest on just the

principal, not the compounding interest, which is the interest including the interest the principal has already earned. A CD pays you compounding interest. So the longer you own it, the more your money grows, and thus the more you make an interest. The penalty is just the simple interest or the interest on the initial investment. So if you put $10,000 in a five-year CD and the interest rate was 3%, in five years you would earn $1,592.74 by the time the CD had matured. But if you cashed out early and paid 18 months of interest, you would lose about $450. If you want to benefit from a CD without the withdrawal penalty,

you can look into brokered CDs. These are CDs, you guessed it, sold by a broker. Here, you're borrowing a single CD that was sold to the brokerage as part of a larger set. This means it may come with a higher rate of return, and if you need to cash out early, you can sell to the new owner without incurring the closing fee that comes with a bank CD. Now, the downside of brokered CDs is that they're traded through a third party. A bank CD is bonded and insured, so it's almost impossible to lose your money. With a brokered CD, you're buying and selling a security through a third party. While it should be just as safe if you use a reliable broker, it is possible to be scammed by a sus broker,

and brokered CDs don't necessarily roll over. Bank CDs can be set up to auto-renew at the end of their investment period, which can be used to create a CD ladder investment strategy. Let me explain. So let's say you want to do this with part of your emergency fund. You split part of your emergency fund into 12 parts. Then every month for a year, you buy a one-year CD. By the time all of your money is invested, your initial CD will be matured. If you need that money, there it is. If you don't, you can reinvest it. You can also choose to keep the interest or allow the interest to be reinvested as well. You can set this strategy up in all kinds of ways with different timelines depending on your goals. It allows you to benefit from the higher interest rates of CDs versus savings

accounts without having to lock up your money. Look, no one's buying a Lambo investing in CDs. In fact, just looking at the rates of return, you may be better off buying treasury bonds. However, unlike treasury bonds, CDs have no fees associated with them. They can be set up to automatically roll over, creating a sensible, low-risk, low-return saving strategy. This is a way to set a little money aside and earn a little money back while you're doing it. For today's tip, you can take straight to the bank. Another low-risk investment strategy is buying investment-grade secured corporate bonds. Just like federal bonds and CDs lend money to the government or banks Just like federal bonds and CDs lend money

to the government or banks, you can buy bonds to lend money to large corporations. These are a little higher risk since there's a chance the company could go bankrupt, but they also have a slightly higher return in exchange. You can buy individual bonds or invest in an ETF that does the research for you. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab?

And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.