Question

Explain how to ladder a CD? Give an example

Why invest your money in a roth IRA? Two reasons

What is more liquid, a CD or a piece of property you own? Why?

Answer 1

1. Certificate of deposits (CDs) are one of the highest yielding deposits accounts offered by most of the banks.

CD Ladder refers to the creation of many CDs which are structured with different terms. By changing the terms, you guarantee that every CD completes its term at regular intervals. The ladder is created by splittng your money into equal amounts and and allocate amounts in a different CDs having different maturities.

Example- Suppose you have $10000 to invest in a CD. Now, rather than putting in a single CD, you split it into 5 equal parts of $2000 each invest in the given manner:

• $2000 in a 1-year CD
• $2000 in a 2-year CD
• $2000 in a 3-year CD
• $2000 in a 4-year CD
• $2000 in a 5-year CD
  
  With each passing year on the date of maturity, one of your CDs will mature. Instead of withdrawing the money, you can renew it as a 5-year CD. By doing so, after 5 years, you will have 5 5-year CDs but only one of the CDs will mature annually.
  It will look like-
  Renew the 1-year CD into 5-year CD
  Renew the 2-year CD into 5-year CD
  Renew the 3-year CD into 5-year CD
  Renew the 4-year CD into 5-year CD
  Renew the 5-year CD into 5-year CD
  
  This will allow you to leverage the highest interest rates on the CDs having longer terms while building the ladder and also to pull out 20% of the funds from the ladder per year.
  

2. If you want a secure financial future, it is advisable to invest in a roth IRA. The reasons why you should invest in a roth IRA are:

• Tax-Free Growth- After meeting certain requirements, the investments in a Roth IRA is grown tax-free. Firstly, you need to be in existence for a period of 5 years at least. Secondly, one of the following conditions needs to be met: reach age 59.5, death, disability, or $10,000 of qualified first time home-buying expenses.
• Lower Taxes in Retirement- Roth IRAs offer great tax savings in the retirement because in a Roth IRA, the withdrawal of the contribution amount and the investment gains is tax free when it is taken in retirement thus it creates no tax liability on the retired person.

3. Asset liquidity is an important factor which is considered before making investment. A liquid asset is an asset which can be converted into cash whenever and whereever needed. Asset liquidity is important in case of financial emergency.

Properties are considered as non-liquod assets. It can take months or years to sell your property at a reasonable price. On the other hand, a CD is also considered slightly illiquid.

But if we make comparison between a property and a CD, a CD will comparatively be more liquid than a property. In a CD, the amount gets stuck for a reasonable length of time but if you want to withdraw the amount before the maturity date, you can do it by paying an amount of penaly. So, it is considered a little more liquid as compared to the property.