What to do with $25,000 if you have never invested before
On December 1st, a client texted me that they were ready to move $25,000. They wanted something that could make them more money than their savings account. At this point, we had met our two goals, paying off the student loans and saving $30,000. I remembered exactly what I did when I was in their position, and it ended up working out. It was a nice first step towards understanding how to put your money to work.
The goal was to show my client that you can give your money to someone and they will give that money back after awhile with a little bit on top. Once you get a taste, you can start getting into fancier stuff. You have to take… the first step. That’s why we built a CD Ladder (anyone? Is this thing on).
What is a CD ladder?
This is my version of it: you have a bunch of money sitting in an account and you LOVE having a bunch of money in an account. You worked hard for it and it is safe there. Honestly, you know you should be “investing” it somewhere, but that seems like a lot of work and everyone seems to lose all of their hard earned money in the market. What is the difference between making six pennies a year in my savings account or losing 10% in the stock market?
Reality check: not EVERYTHING loses money. In fact, there are easily accessed financial instruments that not only have no chance of losing money, but are also just a few clicks away. For example, Certificate of Deposits, or CDs.
You know how your bank account gives you a penny for your cash? That is because they want your cash but you want infinite access to it. When you buy a CD, you have to let them keep that money for a certain amount of time. The bank is willing to pay for that time. This is so they can take mortgages and make even more money. The longer you let them hold your money, the more they are going to pay you. It is called interest and over time it can be very powerful.
Let us hop on the ladder. The goal is to buy a handful of CDs with different time restrictions so that you have, say, $5,000 at any given time instead of $25,000. If you are doing something that you need $25,000 in one day, it’s probably illegal. You should only spend that much if you have had some time to process things and plan. Additionally, most of the CDs have no fees for taking it out early. You can get it back any time if you really need it.
$25,000, here is what we did:
We are going to buy four CDs, each $5,000, at durations of 3, 6, 9, and 12 months. Every 3 months, the bank is going to email you and ask if you either want the money back or if you want to reinvest. As long as you don’t need $10,000 that month, you reinvest that money into another 12 month CD. Every 3 months, you will have $10,000 plus interest at your service. With your $5,000 cash emergency fund, you should be safe. If you need $5,000 or $10,000 more due to an emergency, you can always get the money back with no penalty, but it may take a few days. I strongly feel you shouldn’t be doing anything that you would need nothing one day and $10,000 the next. Even buying a car last minute can wait 4 days.
Step 1: Go to www.bankrate.com and click CD Rates
Step 2: Use to filters to search $5,000 CDs at durations between 3 months and 1 year
Step 3: Shop around for the highest rates
Here is what you are looking for:
No fees for taking the money out early (except interest)
On December 1, 2018 - the two worth looking at were Ally Bank and Discover Bank. Both have a table that allows you to insert the amount you want to invest and it will tell you how much interest you will make. They look a little bit like this:
You can go to “fees” on each, and they both say only “simple interest.” As long as they are not taking “principal” or “initial deposit,” you are good to go. Ally looks like the winner for all 4 CDs. At this point, click “open account” and buy yourself the CDs.
Ideally, you just let this money sit and grow forever because this is a safe, low risk, and easily accessible savings tool. Just pretend that all $20,000 is sitting in that bank account with the other $5,000. This is what would happen if you did nothing for 3 years except reinvest the amount in 12 month CDs at today’s rates (table explanation below):
Highlighted cells represent month and amount that will be available
So on December 1, 2018 - you invest $20,000,
and on March 1, 2019, $5000 of that has turned into $5,009.39. You gave them $5,000 for 3 months, and for that they paid you $9.39
You then reinvest in a 12 month CD, and on March 1, 2020, you get $5,142.12. You just turned $5,009.39 into $5,142.12 for absolutely nothing.
By December 2021, you would turn $20,000 into $21,299.19