What to do with $200,000 for two years if you're risk averse

[Anonymous]

We have $200,000 that we are setting aside for a down payment on our next house, hoping to be able to keep our current home as an investment property. We plan to purchase this property in about two years. My DH is not willing to do anything even slightly risky with this money, but it seems lame to leave it in savings for two years. Our savings account currently earns .8%. The best CD I can find is 1.25% for two years, which doesn't seem much better considering that then this money is virtually untouchable for that period.

Any ideas?

[Anonymous]

Anonymous wrote:We have $200,000 that we are setting aside for a down payment on our next house, hoping to be able to keep our current home as an investment property. We plan to purchase this property in about two years. My DH is not willing to do anything even slightly risky with this money, but it seems lame to leave it in savings for two years. Our savings account currently earns .8%. The best CD I can find is 1.25% for two years, which doesn't seem much better considering that then this money is virtually untouchable for that period.

Any ideas?

Nope. But 1.25% APY is pretty good in today's market if you don't want any risk.

[OTAlexFA]

Just looked at our offerings and the best net yield on a 2-year CD that we have for 200K is 0.65%. If you have 1.25%, take it.

[Anonymous]

What would your rate be for a longer term CD? The difference in the rate may be enough that it makes up for the penalty for early redemption.

For example - if your penalty is all dividends for 6 months (Navy Fed conditions for early withdrawal of more than 1 year, less than 5 years early) then it may be worth it. If you have a 2 year at 1.25, that yields 5031. If you take a 6 year at 2.3 (NFCU current 6yr rate) the yield for 2 years is 9305, penalty of 2311, so net 6994 for an extra 2k return.

Given your high 2 year rate, your 6 year rate may also be higher, so potentially a larger difference.

[Anonymous]

Cardinal has 1.67 for 3 years, not sure what the early withdrawal penalty is.

[Anonymous]

Look into what the early withdrawl penalties are for different CDs. They're usually pretty low, and you could withdraw the money in an emergency. Look at what the FDIC insurance limits are--you may end up wanting to split it into two different accounts at different banks to make sure all of it is FDIC insured. Bankrate.com lists CD rates.

[Anonymous]

Anonymous wrote:What would your rate be for a longer term CD? The difference in the rate may be enough that it makes up for the penalty for early redemption.

For example - if your penalty is all dividends for 6 months (Navy Fed conditions for early withdrawal of more than 1 year, less than 5 years early) then it may be worth it. If you have a 2 year at 1.25, that yields 5031. If you take a 6 year at 2.3 (NFCU current 6yr rate) the yield for 2 years is 9305, penalty of 2311, so net 6994 for an extra 2k return.

Given your high 2 year rate, your 6 year rate may also be higher, so potentially a larger difference.

OP here, this is the advice I need. Thanks to you and the other PP with a a similar suggestion. I can get a 2.27% interest (2.3% APY) CD for six years, with 270 days of interest penalty for early withdrawal. Can someone explain to me if that would make sense?

[Anonymous]

If you want safety, then you cannot expect to make good return. Put it in interest earning savings account and call it a day.

[Anonymous]

Assuming daily compounding that difference (2 yr 1.25 vs 2 years at 2.27 with 270 day penalty) would be a net positive of 839.43 for the 2.27 6 year.

[OTAlexFA]

Anonymous wrote:

Anonymous wrote:What would your rate be for a longer term CD? The difference in the rate may be enough that it makes up for the penalty for early redemption.

For example - if your penalty is all dividends for 6 months (Navy Fed conditions for early withdrawal of more than 1 year, less than 5 years early) then it may be worth it. If you have a 2 year at 1.25, that yields 5031. If you take a 6 year at 2.3 (NFCU current 6yr rate) the yield for 2 years is 9305, penalty of 2311, so net 6994 for an extra 2k return.

Given your high 2 year rate, your 6 year rate may also be higher, so potentially a larger difference.

OP here, this is the advice I need. Thanks to you and the other PP with a a similar suggestion. I can get a 2.27% interest (2.3% APY) CD for six years, with 270 days of interest penalty for early withdrawal. Can someone explain to me if that would make sense?

Good lord, forgive me here.

[OTAlexFA]

OTAlexFA wrote:

Anonymous wrote:

Anonymous wrote:What would your rate be for a longer term CD? The difference in the rate may be enough that it makes up for the penalty for early redemption.

For example - if your penalty is all dividends for 6 months (Navy Fed conditions for early withdrawal of more than 1 year, less than 5 years early) then it may be worth it. If you have a 2 year at 1.25, that yields 5031. If you take a 6 year at 2.3 (NFCU current 6yr rate) the yield for 2 years is 9305, penalty of 2311, so net 6994 for an extra 2k return.

Given your high 2 year rate, your 6 year rate may also be higher, so potentially a larger difference.

OP here, this is the advice I need. Thanks to you and the other PP with a a similar suggestion. I can get a 2.27% interest (2.3% APY) CD for six years, with 270 days of interest penalty for early withdrawal. Can someone explain to me if that would make sense?

My math may be wrong but, based upon the statements, if you essentially are giving up 75% of interest in one year of a 2.3% APY CD (I rounded up), your net effective yield comes out to 1.03% if you withdraw that after two years. The 2 year CD is a better bet in that case.

[Anonymous]

Even with no compounding the 6 year is a better return:

1.25 x 2 = 2.5
(2.27 x 2) - (.75 x 2.27) = 2.84
0.34 x 200k = 675 difference

[Anonymous]

I told you my math may be wrong. This is what happens when you try and rush and make things more difficult than they need be. The 6-year is the better deal. Holy smokes.

[OTAlexFA]

Anonymous wrote:I told you my math may be wrong. This is what happens when you try and rush and make things more difficult than they need be. The 6-year is the better deal. Holy smokes.

Sorry, this is me and I own it. My goodness.

[Anonymous]

The wrench in all of this is that there is a chance interest rates could rise in the next year or so. Probably not a big deal if your horizon is a firm two years, but understand that your predictions assume constant rates. If you think you will kick yourself if the savings rates or CD rates go up, and you are locked into something lower, the strategy would be to ladder the investments between short and long term.