By: Revanche

Contemplating CDs

September 29, 2006

I had considered using CDs as a short term savings tool, but with the high yield savings accounts so readily available it just didn’t seem worth it to lock up my emergency fund money for a relatively small gain. The decision was made to trade off some monetary gain for convenience in case of emergencies.

I had even considered moving a chunk of the money to my ED account at 5.15% but Jonathon’s rate-chaser calculator showed that it would take about 66 days to make up for the lost revenue during the transitional period.

Recently, though, I’ve noticed a blogger or two mention a 5.5% CD that piqued my interest, and then I found that my very own Citibank is offering a 5.5% CD for a six-month term.

Although I’ve been accustomed to expecting my emergency money to remain agile and fleet of foot, maybe it’s time to consider putting a portion of it (70%?) into a short term CD.

The specs:
Term: 6 months
APY: 5.5%
APR: 5.35%
Opening deposit req’d: $500 minimum

The benefits:
Interest can be paid monthly to your CD, checking or savings. For CDs with terms of one year or less, interest can be deferred until maturity or credited to your CD each month. You can also have interest paid by check at the end of the term.

The fine print:
CDs renew automatically at maturity for the same term. If you don’t want to renew your CD, you have a 7-day grace period2 after the CD matures to let Citibank know, either verbally or in writing. CDs that are automatically renewed earn the interest rate in effect on the renewal date.

1 Annual Percentage Yield (APY) assumes interest earned is kept in the CD for the full term.
The terms and conditions of a Day-to-Day savings account, non-tiered insured money market account (“IMMA”) and certificate of deposit (“CD”) held in an Individual Retirement Account (“IRA”) are included in the Plan Documents for traditional and Roth IRAs. The rates for these accounts when held in an IRA can be obtained by calling 1-800-CITI-IRA.

2 During the grace period, money can be added to or withdrawn from the CD, as long as the $500 minimum is maintained.
Annual Percentage Yield (APY) is accurate as of 9/25/2006. The rate will apply only to accounts opened through this site. A penalty will be imposed for early withdrawal of principal. Fees may reduce earnings.

My questions are:
~ How much should I lock away, even if it’s only for 6 months? I think I’m comfortable with the idea of about 60-70% of my current emergency fund, but that does leave me with only about a month’s worth of immediately accessible living expenses.
~ Is it best to deposit the monthly interest back into the CD until maturity? I would assume so, in order to compound the interest and achieve the APY. Or am I illogically working that out? It’s kind of early, still.

Scenarios:

$6k, 6 months, 5.35% APR = $162 interest
vs
$6k, 6 months, 4.88% APR = $148 interest

OR

$7k, 6 months, 5.35% APR = $189 interest
vs
$7k, 6 months, 4.88% APR = $172 interest

Hm, it’s a pretty small difference…. but every little bit counts, and I wouldn’t be losing any interest accruing time since it can be opened and funded directly from my Citi checking account.

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