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I am young college investor looking for some help. I just recently put my maximum investment amount into my Roth and have some long positions in the account. I have about 9 months worth of money set aside as an emergency reserve for myself. Thus, that brings me to where I need some help from the fool community. I currently have $3,000 sitting in my savings account and I really do not want to put it into anything long since I might need the money in the next 3-5 years for med school. Does anyone have any good ideas for how I should invest this money for short term? Some of my possible thoughts have been a money market fund, CD, bond, or even just keep it in my savings account, although I would like to earn a little more on it than just letting it sit in the savings account.

If anyone has any suggestions please let me know.

Thanks,
MAllison10
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How about an I bond? You would have to tie the money up for a year minimum, but after that you could pull it at your convenience and the rates beat pretty much every other 1 year CD, savings account, etc.
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High-yield checking accounts through at credit union are a good place to park small amounts of cash. It isn’t hard to find one offering at least 3% on the first $25,000.
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Wouldn't I have to hold the Ibond for up to 5 years? I thought I read somewhere that if you cash the bond within 5 years you will have to pay a fee?
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trader2012,

You wrote, High-yield checking accounts through at credit union are a good place to park small amounts of cash. It isn’t hard to find one offering at least 3% on the first $25,000.

Cite.

Your information is out of date. These offers dried up a year or two ago. Bankrate.com quotes Everbank as the best national checking offer with an 0.98% APY. Admittedly Bankrate.com has not been known to be exhaustive. Even so, even markber's website ( http://ibankdesign.com/board/Checking_rates_f118.html ) shows nothing of note and his board has quit generating any real tips as well.

I imagine the best rate you might find from some credit union or other niche player is perhaps 1.25% APY; but if that exists, I don't know where to find it.

- Joel
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MAllison10,

You wrote, Wouldn't I have to hold the Ibond for up to 5 years? I thought I read somewhere that if you cash the bond within 5 years you will have to pay a fee?

The holding requirements for an I bond are 1 year minimum (you can't cash out before then) and during the first 5 years you will loose the most recent 3 month's of interest as penalty. http://www.treasurydirect.gov/indiv/products/prod_ibonds_gla...

The current I-bond yield is 2.20%, which is an inflation component of 2.20% and a base rate of 0%. That still compares favorably against an Ally Bank 5-year CD, which currently pays 1.69% APY and has 90 days of interest lost as the redemption penalty. (Ally probably has the smallest early redemption penalty in the market and some of the best CD rates.) Between the two, the I-bond looks a little better if:

1. You are certain inflation will average no less than 1.69%,
2. You are certain rates will remain this low for another year, and
3. If you are certain you don't need the money for the first 12 months.

Honestly I think think an I-bond is a fair bet for cash that you need to hold for 3-5 years - if you can't afford to risk the principal.

Also despite what trader2012 said, you won't beat these rates with a checking account right now. Sorry. Short term, low risk, fixed rate income options suck at the moment.

- Joel
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Your information is out of date. These offers dried up a year or two ago.

Joel,

It is you who are misinformed. I am receiving a 3% APY on my high-yield account with my credit union, and there are plenty of others offering the same rate or better on the first $25,000 to $30,000.

trader2012
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I imagine the best rate you might find from some credit union or other niche player is perhaps 1.25% APY; but if that exists, I don't know where to find it.

If you go to the fatwallet rewards checking account forum http://www.fatwallet.com/forums/finance/775437/ you can find some high rate deals. However, they generally come with significant strings....

Gibsland Bank Rewards Checking currently has a 4.11% rate up to $15k. However, you must have 15 debit card purchases and 1 direct deposit post and clear each month, and in order to open the account, you must visit one of their branches in person. Their branches, when open at all on weekends, only have drive-up service on Saturdays, so the in person visit would have to be Mon - Fri. And unless you happen to live near Shreveport, LA - you will probably end up spending more money on the trip to open the account than the $500 or so you might be able to earn the first year (after accounting for the debit card transactions in the balances) if you were willing and able to meet the other requirements.

The next bank on the list (skipped the CU - it's in Louisiana, too) is First Community National Bank, with 7 branches in south central Missouri (Rolla has 2 branches), where you can earn 4.01% APY on up to $10k. They don't seem to have a way to open an account on their website, but don't specifically state that you have to visit a branch, so you may be able to open an account by calling them (on their non-toll-free number) and sending paperwork in the mail. Their account requires 20 debt transactions per month, plus a direct deposit or ACH.

Coppermark Bank has a 4.00% APY on up to $25k with a requirement for 16 debit card transactions and 1 ACH/direct deposit, and they also don't seem to have an option for opening an account on-line. However, their branches in the DFW area and Oklahoma are probably a little more accessaible/available, and they say that you can call to inquire about opening an account.

So there are still some deals around that say they offer 4%. But given the requirements for debit card transactions, you would have a hard time actually realizing a 4% return on your money. In addition, the banks don't seem to make it easy to open an account if you don't live near one of their branches.

Not to mention, if this is supposed to be 'savings' - being required to use debit card transactions seems counter-productive.

AJ
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MA10,

you have asked the wrong people....run....

seriously bonds??? I bonds??? wrong!!!

checking accounts or credit unions??? who cares???

leave the money in a credit union....preferably PenFed or any other govt military credit union they have the best returns......not much though.....

bonds are the worst of the worst.......you will get hammered later....the cycle is moving on.....

As for the Roth.....sit on cash and wait two years.....add in the meantime and wait for the next massive bottom in the markets.....There are generally three major bottoms in a bear market.....we have only had two.......

dave
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seriously bonds??? I bonds??? wrong!!!
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bonds are the worst of the worst.......you will get hammered later....the cycle is moving on.....


Since I bonds are not transferable and can be sold back to the Treasury at face value after holding a minimum of 1 year (with a penalty of 3 months interest if you sell prior to holding for 5 years), I bonds will not 'get hammered later' because of the cycle.

There may be other reasons to not buy I bonds, but the fear of 'getting hammered' is not one of them.

leave the money in a credit union....preferably PenFed or any other govt military credit union they have the best returns......not much though.....

Current I bond rates are significantly better than savings account rates at the military CUs, and comparable to CD rates, making them a reasonable option to consider, compared to leaving money in a CU.

AJ
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Someone writes:

Current I bond rates are significantly better than savings account rates at the military CUs, and comparable to CD rates, making them a reasonable option to consider, compared to leaving money in a CU.

To which I say, "Yes and no." I-Bonds are tax-advantaged, which bumps their current rate of 2.20% (through Oct 31, 2012) up by whatever one's marginal, state income-tax rate might be. But on a pre-tax basis, I-bonds offer only 73% (or less) of what can be obtained from a typical, high-yield checking-account at a credit union. Worse, if the penalty of forfeiting three-month's interest is factored in for holding periods of less than 5 years, then the yield-disadvantage of I-bonds increases further.

This isn't to say that buying I-bonds is to be avoided. It all depends on how much money one wants to lose, versus how many hassles one is willing to deal with. I-bonds are easy to get into and out of. But that convenience comes at a price. High-yield checking accounts are easy to get into and out of, but they do have ongoing administrative requirements.

Given that the opening post named a very tiny amount of money to be parked while awaiting a very immediate future need, whatever is done with it won't make much difference. Whether it is put under the mattress, or in a bank account, or in I bonds, won't make a significant difference. But the reasons why the choice is made are truly important, because they become a template for future financial decisions, and sound plans are the reason why some investors are doing well and most are doing so poorly.

What's the current, median net-worth in this country? A mere $77,000 according to some reports, closer to $277,000 according to others. Both of those amounts are laughably inadequate, and they are destined to become even smaller as the Fed rolls out QE3, QE4, QE4, all the while continuing to keep interest-rates as near zero as possible. The net-effect of their dual policy will be dollar-depreciation (AKA, price inflation), which is the reason why investors should not be holding a penny more of cash than they truly needed to maintain prudent levels of liquidity. And of the cash they do choose to hold, it behooves them to seek out the highest rates of return they can find, which, these days, will probably come from a high-yield checking account at a credit union, not I-bonds. (IMHO, 'natch)
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significantly better


you might wish to retract the heart of what you said....


show us the money....or in this case the percentages.....my comment was it did not matter......it is minor in other words.....for the CU or the Ibond or the bond or the savings account......minor....unless you are using millions of dollars......

But establishing a CU account is worthwhile.....they are cheaper lenders and better savings institutions......

Dave
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significantly better

you might wish to retract the heart of what you said....

Nope, not really. At least not if you look at the entire phrase, which was Current I bond rates are significantly better than savings account rates at the military CUs

PenFed CU (the only 'military CU that I am aware of that will let anyone join for a $20 donation) - Savings rates for an account opened today: 0.10% - 0.25% https://www.penfed.org/money-market-savings/
Current yield for an I-bond purchased today: 1.10% http://www.treasurydirect.gov/indiv/research/indepth/ibonds/...

The I bond rate is 4.4 - 11 times higher than the PenFed savings account rate, which counts as 'signifcantly better' in my book.

my comment was it did not matter......it is minor in other words.....for the CU or the Ibond or the bond or the savings account......minor....unless you are using millions of dollars......

If you're willing to give up $85 - $100 a year for every $10k in savings that are targeted for use in 3 - 5 years, it may not matter to you. But it may matter to others, and it is just as much a 'reasonable option' to consider as a CU savings account.

AJ
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I currently have $3,000 sitting in my savings account and I really do not want to put it into anything long since I might need the money in the next 3-5 years for med school.

$10k some $85

$3k is the amount.....he needs loans probably....CU......PenFed is the best.....

It is a mix and match of very little v. very little, but more.....

Dave
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$3k is the amount.....he needs loans probably....CU......PenFed is the best.....

The rate for $3k at PenFed is 0.10%, for a total interest earned of $3 each year. Once you account for the $20 donation required to join if not otherwise eligible, putting $3k in a PenFed savings account would net -$17 after one year, -$11 after 3 years and -$5 after 5 years.

He'd be better off leaving it under his mattress.

AJ
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The rate for $3k at PenFed is 0.10%, for a total interest earned of $3 each year. Once you account for the $20 donation required to join if not otherwise eligible, putting $3k in a PenFed savings account would net -$17 after one year, -$11 after 3 years and -$5 after 5 years. He'd be better off leaving it under his mattress.

AJ,

Paying the $20 joining-fee (if he needs to) creates life-long eligibility to participate in PenFed's offers, some of which have been decent in the past, such as 3-year CDs paying 6.25%. Currently, PenFed has so much money from their 10-year, 5% CD sale that they no longer have to offer decent rates on anything to anyone.

Well, that should be no surprise, that money has a price, and that its price is currently low except for them that can borrow lower and lend higher, which describes the Credit Unions currently offering 3% or better for checking accounts. They are willing to pay up for cash, because they can borrow at that rate and turn a fat profit on their loan portfolios.

Yes, $3,000 is tiny money, merely petty cash, and whatever decision is made about it won't matter in terms of its own losses and gains. But the process of making the decision is crucially important because, as I said before, it becomes a template for future decisions. More to the point, if a would-be investor doesn't know how to make a good decision about $3,000 of savings, how is he or she ever going to make good decisions about the $300,000 to $3 million of investments he/she will likely be dealing with over the course of their financial lifetimes?

My advice to that person is this. "Get the small stuff right when and while it is still small stuff, so that the big stuff can be gotten right when its time comes." Practice, practice, practice. That's all this investing stuff is.

trader2012
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which describes the Credit Unions currently offering 3% or better for checking accounts. They are willing to pay up for cash, because they can borrow at that rate and turn a fat profit on their loan portfolios.

That doesn't make sense. The cost of money is significantly less than 3% and loans (at PF or anywhere) are often at 3% or less. The spread a CU would be getting on a 3% deposit is either tiny or negative. There is no fat profit at that high of a rate.

From their site:

Auto Loans..................1.49% APR*
30-Yr Mtg.........3.625/3.668% APR
Home Equity Loan......1.99% APR

Currently, PenFed has so much money from their 10-year, 5% CD sale that they no longer have to offer decent rates on anything to anyone.

And what bank or CU in their right mind wants to be sitting on any CD that obligates them to be paying 5% in today's market?

National City did a ton of 5% CDs in 2008 too - right before they were bought by PNC. They also had checking accounts paying over 3%. National City did it because they needed the cash to stay afloat. After they were bought, PNC took a 2%+ loss (negative spread) on every one of those 5% CDs and the 3% checking accounts went to less than 1% in just six months.
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And what bank or CU in their right mind wants to be sitting on any CD that obligates them to be paying 5% in today's market?

Hawk,

Not CDs, checking accounts, and not 5%, more like an APY of 3% that the CU can change on a moments notice. Interest-rate "specials" at banks and credit-unions are nothing new or unusual. The institution anticipates a short-term liquidity problem, so they they borrow from their customers. It happens all the time, and those who shop interest-rates aggressively can position themselves to obtain better than average rates.

Put the matter in practical terms. You're a householder, and you know you should have an emergency fund. A common rule of thumb is 3-6 months of living expenses. The median household income in the US is $54k. Therefore, the median emergency fund ought to be in the range of one-quarter to half of that. In the overall scheme of things, $13.5k-$27k is tiny money, hardly worth worrying about. But if 3% can be earned on that money by holding it in a high-yield checking account at a credit union, rather than getting 1/10 of 1% at a typical bank, why not do it? The yield difference, even after paying taxes, would fund a camping trip for the family, meaning, they'd be able to see a tangible benefit from their financial prudence.

trader2012
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Trade, I was replying to your quote where you stated:

Currently, PenFed has so much money from their 10-year, 5% CD sale that they no longer have to offer decent rates on anything to anyone.

You stated that like it was a good thing. Those CDs are a liability, not an asset.

more like an APY of 3% that the CU can change on a moments notice.

Sure they can, but they likely have a negative spread on it until they do. There is no fat profit from liquid savings at 3% for the CU. There is for the customer but not the institution - not at the cost of money these days.
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Hawk,

The point you are failing to understand is which dollars are being lent. As an example, if a CU borrows $1 mil at 3%, but due to fractional reserve banking, it can lend out $7 mil more than they borrowed at a rate of 2%, how are they not making a fat profit even after administrative costs and the 1% loss on the first $1 mil of loans?

The answer, obviously, is that they aren't losing money, because they are lending out money they, in effect, have created electronically (aka, "printed") rather than borrowed. What is the cost to them of that $7 mil? The spread between the costs of borrowing $1 mil and whatever they can get from lending that $1 mil, which is a loss of 1% or $10,000. So that $10,00 becomes the cost of borrowing $7 million or too few basis points to even matter. What does mater and matters hugely, is the creditworthiness of their lending portfolio. That's what the lending institution is going worry about, not the tiny cost of borrowing the money that enables them to print a whole bunch more of it.

Charlie
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