I am wondering exactly how CDs work. I am not looking fo investment advice just factual answers for how you can make money for them.
I know that they are low return but they are FDIC insured. I am going throw numbers around here and I know that things can change. From my understanding on how they work, if you put X amount of money in, at the maturity date you get X+Y (Y being the intrest rate).
For example, if I put $10,000 in a 1 yr CD, at 2% intrest, after the year, I would have $10,200. (I am not counting taxes on the money to make this easier).
What if I had $100,000 and put it in a 7-day CD. Would I have $102,000 after the 7 days or would it be less? Is the intrest that the posted at the bank a APR or is it for the length of the CD? Could I have the intrest sent to a checking account and have the money rolled over to another 7-day CD, thereby having a weekly income of $2,000? Is there something that prevents you from keep rolling over the money every week? Cost of living increases aside, could I have a stable income for the rest of my life if I did this?
I have a friend that stands to inherit $100,000 and I FEAR that he will sqaunder it. I recommened that he check into doing this. If so, he will be set for the rest of his life maybe working part time to cover cost of living increases.
If they work the way that I think they do, personally I would take 25% of the intrest and roll that back into the CD, then use the remaining 75% as a very large supplement of my income.
I know that he will have to pay taxes on it but I also know that he may not make the best investment decsions if he were to invest it in the stock market or such. I mean it is his money and he can do with it as he wishes but I am hoping he uses it wisely and CDs are a very low risk investment.
If I remember correctly, a 2% 1 YEAR CD would yield some amount around $10,200 depending on when the interest is compounded. However, the interest is not per term, but yearly (hence the term annual percentage rate). If you put $10,000 in a 2% 7-day CD you would get somewhere around $10004 depending on how often it’s compounded.
At my bank you can get 4.25% APY (yield, not rate) on a 30 Month CD if you live in California. that would yield $4250 of interest a year from a $100,000 CD, but the interest would be locked into the CD for 30 months.
Using rough estimation, in 10 years, if he doesn’t touch the money it would grow by $50,000. In 10 more years, it would grow another $80,000 putting the total profit at $130,000. In 10 more years, it would grow $120,000 putting the total profit at $250,000.
$250,000 of profit that you can only reap in 30 years is hardly something you can live on. In fact, I doubt there is a place in the US where you can safely invest $100,000 and live on the interest.
I did an essay in college once that analyzed how much money must you have to live comfortable for the rest of your life and beat inflation without paying attention to your investments(i.e. nothing but index funds, CDs, etc.), etc. I came up with the comfort zone of $10,000,000 minimum, depending on your personality. Basically I assumed that you must have a certain minimum income a year that goes to luxuries or you will dip into your savings (nobody wants to have $5 million in the bank and live poorly)
I have always said that if I won the lottery, the first $2,000,000 would go into savings accounts (split into multiple accounts in different banks to maintain FDIC insurance) and any intrest would be funnelled into a checking account. I mean at 2% that would be $40,000 a year in income.
By the way, if you don’t want to have 20+ different checking accounts, there are companies that sell insurance plans on the non-FDIC-insured portion of your deposits. You can probably ask your bank’s branch manager about that.
Also note that $40,000 a year and $2,000,000 in the bank is going to get eaten up by inflation really really quickly so you have to arrange your investments that at least both the amount in savings AND whatever your take-home interest is are both above the nominal inflation rate.
Also, most people will not be comfortable with $40,000 a year income if they had $2,000,000 in the bank. Hell, where I live $40,000 a year income is not enough for a single person living in a studio apartment. With $1000-$1200 for rent, and $300-$500 for car needs(insurance, gas, repairs, etc.), with another $200-$300 for household bills you pretty much would only have money left for some groceries.
So if you are planning on winning the lottery and living on it for the rest of your life better plan on winning a big one.
As noted in the FDIC link in this thread, it isn’t quite that easy. You need to maintain your deposits not simply in multiple accounts, but in different types of accounts.
The bolded part is the important part. Accounts in different banks have separate $100K limits (question #10 from that FAQ), even if the two accounts have the same ownership category.
The amount of FDIC insurance that you’re elligble for really depends on the titling of the accounts more than the different account types. If you had a sizeable stock of money as long as you had enough relatives you could protect all of it.
To water down a long explaination, basically you get an extra $100,000.00 worth of coverage for every beneficiary that you add to the account per person who adds them.
Example: If you had a joint account with your wife, you would be covered for $100,000 and so would she. If you added a beneficiary then the beneficiary’s coverage would extent to both of your shares. So the beneficiary gets 100,000 in coverage from the both of you, brining the total coverage amount up to $400,000. If you were to name 6 blood relatives as beneficiarys then you could easily get over 1,000,000. in FDIC coverage.
But I wouldn’t worry about every having to use it. And also it been a long time since I was trained in FDIC so I might be a bit off, but its very close to the description above.