Welcome to Asking for a Friend, Grow's new money advice column. Got a question for one of our money experts? Email us at email@example.com.
Dear Asking for a Friend,
We realize we have some extra money in our emergency fund, which is great, and we want to do something smart with it besides just tucking it away for the long term. We're also putting money in retirement accounts and college funds.
We were thinking CDs, but does anyone do CDs anymore? We have also thought about doing some sort of socially responsible investing, rather than chasing the highest interest rate. We don't know if there is an FDIC-insured investment of that type but figured we'd ask.
If not, then I guess we just make money from whatever it is that these banks are investing in, and then give a percentage of it away to something socially responsible, as part of our overall charitable giving. We just would rather not inadvertently give money to people doing harm.
What do you think? Is there a relatively safe, relatively short-term way to use money wisely in a socially responsible way?
Saving for a Rainy Day
Dear Saving for a Rainy Day,
Congrats on creating a solid financial foundation. It's nice to hear that you've been able to save for both retirement and college — no small feat for parents these days. As far as where to park your extra money, before you do any investing, I would first make sure that you have enough in the account to cover at least six months, just in case an emergency does happen.
Then I'd like for you to answer this question: How do you want this money to work for you? What outcome would make you feel most fulfilled and satisfied? There are no wrong answers here. Once you have that in mind, you're ready to allocate those savings towards a new goal.
If you want to invest in an asset that offers a predictable, or even a guaranteed return, because security is important to you, a certificate of deposit or CD might be your best option towards reaching that goal. And yes, people still invest in CDs!
Yields on CDs aren't that enticing when compared to, say, a stock's potential return over the long run. But if your risk tolerance is low, a CD might be the way to go. The good news is that all bank deposit accounts are protected by the Federal Deposit Insurance Corporation up to $250,000 per depositor in the event of a bank's failure.
As of November 2019, the yields on a one-year CD are going as high as 2.2%, depending on the financial institution and terms.
But I also hear that you're leaning towards making an impact — either through donating or investing in socially responsible investments. You're not alone: This is a trend. Socially responsible investing (SRI) has grown 40% year over year since 2016.
As you know, SRI is a form of investing that takes into account the environmental, social, and corporate governance factors of a company. The goal is that these investments will produce positive returns for investors and also make a beneficial impact on society.
But this would be an investment and, just like any market investment, it would be subject to risk and volatility.
If you anticipate needing this money back in the next five years or sooner, I wouldn't recommend investing in an SRI fund or anywhere that's going to make your cash vulnerable to market unpredictability. If you can say bye-bye to this money for many years to come, then you have more time to ride out and recover from any big dips in the market.
Last but not least, if you want to be charitable with this money, then writing a check to an organization you want to support can be a great way to make a direct impact. You can search for charities and nonprofits and see their ratings at sites like Charity Navigator and Charity Watch. And now's a better time than any. With the end of the year approaching, your contribution could count as a tax deduction for 2019 and help to reduce your taxes.
Bottom line: You've got options. The first step is to figure out your goals and risk tolerance. The right move is waiting for you.
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