A Penny Saved

Jane at Boston Gal’s Open Wallet has an interesting post up about Certificates of Deposit as an Income stream. The example she uses is a one year Certificate at 5.51%.

Using Jane’s example, the income from this CD would be $470.92 per month. The one caveat is that that income includes the initial investment. In otherwords, as you pull the monthly income, you’re also pulling the original investment. In many cases, the institution that holds the CD would apply a penalty of some sort for withdrawing the investment early. That penalty usually ranges in the area of 3 months interest on the amount withdrawn. Without doing the math, I would venture to guess that the penalty for using a CD in such a way could be somewhat burdensome. Consider that the first three months worth of income would actually be at a loss or break even.

One way around that would be to only invest the initial amount minus the first three months of “income payments” and begin taking the money out in the fourth month. Doing so would eliminate the loss of the penalty while still gaining some interest. Of course it would greatly decrease the interest gained over the life of the CD.

A better way to do this would be to begin early and have the interest paid into a savings that you could pull at will without penalty. Of course, to do this would require a much larger initial investment in the range of $500,000 before the interest payment’s to the savings would be large enough to equal monthly payments of any significance.

If you’ve got the money to invest and sit on, using CD’s as an income stream is certainly a viable option. For most of us that are still working on debt repayment, though, it would not be a smart money move.

Thanks again to Jane for pointing out a viable option for long term income generation.

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