CDs/401k/Building Credit

[rebirth2316]

I assume with advancing maturity I've become to care about long-term financial security in a matter of months. I have begun to research investments and have a fair idea of where I'd like to place my money, but am interested in personal experience in the following subjects.

CD's - I'm looking into starting with a small 6-month CD after tax returns in February, purchasing one at $2,500-4,000 with CIT Bank. I'll start with a 6-month which will mature perfectly in line with a $7,000 bill I must pay in October. I figure if the money is tucked away, and untouchable, I may as well make the small 1.25% return.

If my experience is well, the next tax return, in February 2017, along with about 75% of my annual savings would be put into an 18-month CD. The CD would be no less than $10,000, no greater than $15,000. An 18 month CD generally yields about the same as a 6 month, at 1.25% APY. So really you get about 1.8% returned from your initial investment. The CD matures on $10,000 at around $10,250, after compound interest.

My goal for these CD's is to make my money untouchable until the time where I plan on making large purchases. So I may as well make even these small amounts of interest on it.

Has anyone had any experience with CD's or have any better suggestions to offer? I have a $7,000 purchase to make in Oct. 2016, and an $11,000 purchase to make in Sept. 2018.

401k- My company utilizes T. Rowe as a 401k investment plan. They will match up to 3% of my investment quarterly. I plan on utilizing this as much as possible. I am 20 years old and have heard many times over that if I start now and don't touch it I can retire a millionaire.

The only questions I have regarding T. Rowe and 401k is that I know there are low thru high risk investments. What is the right path to take?

Building Credit I know how important credit is, trying to get my first car without credit was a hassle. I currently have no established credit. I've looked into opening secured lines of credit to help build a background. Which are the right ones to use?

I also have a line with Verizon Wireless, although I'm not the primary line holder. They will take a $400 security deposit, make me the primary line holder, and after a physical year of timely payments will credit the deposit back onto my account. Which would give me about 3 months without a cell phone payment. Will this also build my credit?

Thanks for any and all information.

 

[Superfluous]

not sure about CDs because I've never dealt with them.

for 401ks, T Rowe Price should have a selection of investment options. at least when i do 401k allocations (through fidelity), i have a whole bunch of funds of many varieties to choose from. personally my opinion is that, while young, a fairly aggressive investment strategy (read, not reckless but with a majority/totality of the investment in stocks instead of bonds etc.) is probably best, or at least that's what i've chosen to do with my own plan. you should also consider whether you want to take a roth 401k or a traditional 401k; i'm sure t rowe price has a calculator that helps you decide, and if not, i know fidelity has one. and, of course, it makes sense to invest at least 3% (or however much is matched), since it's essentially free money assuming you can't make more with that money investing on your own.

for credit, i honestly don't know too much since i got my first credit card earlier this year. i dont think the situation you've outlied will hurt your credit, but it probably won't help much either. again, google might be your best bet on this since there are a slew of things that contribute to your credit score, but some of the largest contributors are timeliness of payments and credit utilization. actually, check out creditkarma.com; i found them pretty useful in the past

 

[rebirth2316]

personally my opinion is that, while young, a fairly aggressive investment strategy (read, not reckless but with a majority/totality of the investment in stocks instead of bonds etc.)

So basically, T. Rowe will allocate my investments into the stocks that they're financial experts are investing the company in?

Can I split that up into say 40% aggressive, 60% passive?

 

As far as the credit goes I'd suggest getting the student discover card.

They gave me a $1000 credit line with no credit at all, and the terms and benefits seem reasonable.

Obviously do a bit of research on handling a credit card, but that'd probably be a good option.

 

[SuF]

Make sure you get those 3% matches because that is just free money. You can be super aggressive the your 401k with just stocks if you want. They tend to go up over the long term and since you are young you are not going to touch them for a long time. You can split it with some amount of bonds if you want to. That is less risky so it might have less return but it also allows you to sell the bonds if the market crashes and invest back into the low stocks.

CDs are a fine tool if you know you will need them money in a set number of months. There are some high yield saving accounts that earn decent interest (up to about 1%) that you can find online and then your money is not stuck. I highly recommend starting a ROTH IRA as well.

 

[JSand]

Building Credit I know how important credit is, trying to get my first car without credit was a hassle. I currently have no established credit. I've looked into opening secured lines of credit to help build a background. Which are the right ones to use?

I also have a line with Verizon Wireless, although I'm not the primary line holder. They will take a $400 security deposit, make me the primary line holder, and after a physical year of timely payments will credit the deposit back onto my account. Which would give me about 3 months without a cell phone payment. Will this also build my credit?

A phone plan does NOT show up on your credit report unless it becomes delinquent. Your best bet is to do what i suggested DD to do above and it's to get the Discover student credit card.

Start of small, don't overspend, pay in full at the end of the month and watch your score jump in the first 6-12 months.

As for the CD's that's a great idea if you don't mind locking away your money for 6 months, a better idea is to put it into your 401(k) and when you need the money, take a loan against your 401(k). When taking a loan out against your 401k, the interest you're charged goes directly back into your 401k so it's basically an interest free loan but probably earning a higher yield than the CD will. That's just a suggestion. I've seen some CD specials recently at 1.99% and 2.27% APY so make sure you shop around before making that decision!

 

[rebirth2316]

A phone plan does NOT show up on your credit report unless it becomes delinquent. Your best bet is to do what i suggested DD to do above and it's to get the Discover student credit card.

Start of small, don't overspend, pay in full at the end of the month and watch your score jump in the first 6-12 months.

As for the CD's that's a great idea if you don't mind locking away your money for 6 months, a better idea is to put it into your 401(k) and when you need the money, take a loan against your 401(k). When taking a loan out against your 401k, the interest you're charged goes directly back into your 401k so it's basically an interest free loan but probably earning a higher yield than the CD will. That's just a suggestion. I've seen some CD specials recently at 1.99% and 2.27% APY so make sure you shop around before making that decision!

I was actually approved today through a Credit Union for a $300 starter credit line. I plan to use it for gas only, and basically turn my gas into a bill instead of paying it at each pump.

After a year of timely payments it rolls over into a platinum card, and I can increase the credit limit. I am very excited.

As for the suggestion of choosing to invest in my 401k aggressively in oppose to purchasing a CD, aren't there penalties for withdrawing from your 401k?

So say I put an extra $2,000 on top of what I have already accumulated in there. I let that $2,000 build for 6 months aggressively and then withdraw it. Won't that cut into my starting funds? Or would the compound interest on the original balance gained from having a larger balance cover those charges?

 

[Superfluous]

So basically, T. Rowe will allocate my investments into the stocks that they're financial experts are investing the company in?

Can I split that up into say 40% aggressive, 60% passive?

not necessarily into stocks they have particular knowledge about; this isn't a private wealth management kind of thing. they probably have a bunch of funds, and they let you pick your allocations in each. the easiest way to explain it is to have you go to your 401k account and dabble around with things

but yeah, you should be able to allocate however you like.

 

[JSand]

I was actually approved today through a Credit Union for a $300 starter credit line. I plan to use it for gas only, and basically turn my gas into a bill instead of paying it at each pump.

After a year of timely payments it rolls over into a platinum card, and I can increase the credit limit. I am very excited.

As for the suggestion of choosing to invest in my 401k aggressively in oppose to purchasing a CD, aren't there penalties for withdrawing from your 401k?

So say I put an extra $2,000 on top of what I have already accumulated in there. I let that $2,000 build for 6 months aggressively and then withdraw it. Won't that cut into my starting funds? Or would the compound interest on the original balance gained from having a larger balance cover those charges?

You'll be heavily taxed and penalized if you take it out as a withdrawal, if you take it out as a loan you will not be penalized.

Congrats on your first credit line! I believe lines of credit affect your credit score a bit differently than a credit card does so i still suggest getting your first credit card.

 

[rebirth2316]

You'll be heavily taxed and penalized if you take it out as a withdrawal, if you take it out as a loan you will not be penalized.

Congrats on your first credit line! I believe lines of credit affect your credit score a bit differently than a credit card does so i still suggest getting your first credit card.

Thanks, and sorry but I actually meant that it is a credit card. It's a starter credit card.

If I withdraw from 401k as a loan do they charge me interest? Also are they only monthly loans or can you do yearly?

 

[Superfluous]

not sure how withdrawals from 401ks work. im sure you can find this info on t rowe price's site (or just call them if you can't access it easily). i would assume you would get hit with fees/loss of company matching for doing this. generally, it's best to consider 401k funds as untouchable unless you REALLY need a short term self-loan.

 

[JSand]

Thanks, and sorry but I actually meant that it is a credit card. It's a starter credit card.

If I withdraw from 401k as a loan do they charge me interest? Also are they only monthly loans or can you do yearly?

You'll get charged interest, the interest payments go back directly into your 401k. You pay them usually directly from your paychecks.

I remember i took a small loan from my 401k about 3 years ago for $1000, ended up paying $1050 back total with the interest and it all went back into my 401k, the payments were divided equally and taken out directly from my paychecks ontop of my contributions. I think the payments were $20 per paycheck. No fee's either, 100% free. I may be wrong with your companies 401k because mine was actually with fidelity at the time but i believe they generally work the same no matter the company.

 

[rebirth2316]

You'll get charged interest, the interest payments go back directly into your 401k. You pay them usually directly from your paychecks.

I remember i took a small loan from my 401k about 3 years ago for $1000, ended up paying $1050 back total with the interest and it all went back into my 401k, the payments were divided equally and taken out directly from my paychecks ontop of my contributions. I think the payments were $20 per paycheck. No fee's either, 100% free. I may be wrong with your companies 401k because mine was actually with fidelity at the time but i believe they generally work the same no matter the company.

That's awesome, and a really good idea. I'll probably make more money off of investing the tax return in the 401k for 6 months than in a CD making only $100 at most.

I really appreciate the advice and information I setup my 401k last month but payments will start going in the beginning of September so I haven't been able to tweak with it yet. I feel wiser now about where I should put my money.

Thank you everyone for your valuable feedback.

 

[Shall Skill]

Please don't waste your money/time with CDs. Even mutual funds are better

 

[rebirth2316]

Please don't waste your money/time with CDs. Even mutual funds are better

Could you please elaborate?

 

[Shall Skill]

Could you please elaborate?

The average CD makes about 3% annually, thats almost what inflation's rate is and on top of that, after taxes you make very minimal returns. You can get into a mutual funds and make around 5%, or you can invest into stocks and get around 8% annually

quick google search: http://www.financialsamurai.com/cd-investment-alternatives-why-im-no-longer-investing-in-cds/

 

[DRSX]

Well, here in Canada you can build your credit up very fast it is basically a loophole, you go and withdraw money from your credit and deposit it right away, this can be done at the bank and it builds up your credit, not sure where you are from.

 

[Arcus Isidar]

At 20 years old, you have a lot of time to ride the ups and downs of the stock market. Therefore your 401k should be very aggressive, 80% stocks and maybe 20% bonds or less. You could even consider 100% equities at your age.

My suggestion would be to find the T.Rowe fund that offers the greatest diversification and exposure to large US companies, with the lowest MER (fee). This one looks good: http://www3.troweprice.com/fb2/fbkweb/snapshot.do?ticker=TRBCX

Of course due your due diligence before acting on any of this. This is just what I would do.

The 401k is intended for retirement, in Canada there are 10-30% withholding taxes for withdrawing from our "401k equivalent" account before retirement.