Question

You have $10,000 to deposit. You save it, earning interest by loaning is use in the money market to your bank. You anticipate you will need to replace your washing machine within the year, however, so you don’t want to surrender all your liquidity all at once. What is the best way to save your money that will give you the greatest increase in wealth without too much risk and while still retaining some liquidity? Explain your reasons for your choice of a solution.

Answer 1

The best way is to invest $10,000 in "Liquid Certificate of Deposits" also known as "No-penalty Certificate of Deposits".

Unlike other Certificates of Deposits (CDs), No-penalty CDs allow account holders to withdraw the amount before the maturity date without any fee or penalty.

Generally there is a lock-in period associated with these deposits, typically 7 to 10 days after the CD is funded. It means that, If lock-in period is 7 days, the amount cannot be withdrawn before expiry of 7 days from the date of investment in CD. As the need to replace washing machine is not in immediate future, lock-in period is affordable.

Thus, investment in No-penalty CDs will serve the purpose of greatest increase in wealth by minimizing risk as well as retaining the liquidity.