Finance guru Dave Ramsey has some pretty strong words when it comes to CD investing. Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates."
Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money. He suggests investing in mutual funds instead.
The reality, though, is that CDs are much more than glorified savings accounts and Ramsey is dead wrong in saying they don't have a place in your portfolio.
Here's why Ramsey is so wrong about CDs
There are a couple big problems with Ramsey's anti-CD position. First and foremost, CDs offer huge benefits that savings accounts don't.
In general, CDs provide higher yields than savings accounts
While that's not always the case, it's true often enough that you'll do better by opening a CD than just sticking your money in a savings account.
Ramsey even acknowledged this himself, but claims the rates aren't high enough to matter. Over the long term, though, the higher returns can add up. And why would you want to accept a lower rate when you could get a higher one? Can you afford to just leave money on the table?
CDs lock in your rate
With a savings account, rates are variable and thus could go down at any time. CDs allow you to earn a guaranteed rate for the duration of the CD term.
This could be an especially valuable benefit right now, as the best CD rates top 5.00%. You can lock in this great rate on a risk-free investment and won't be affected if the Federal Reserve lowers rates later this year.
If you put your money into savings, you might get a good rate right now. But if market conditions change, your rate will fall quickly and you won't be able to go back in time to lock it in. With a CD, you'll know upfront exactly how long you'll get to keep today's high rates.
CDs encourage you to keep your money invested
When you open a CD, you must leave your funds invested for the duration of the CD term, otherwise you're penalized in the form of losing some of your earned interest. This is referred to as an early withdrawal penalty. Ramsey says this is a downside for CDs, and it can be if you invest funds you should have kept accessible (like your emergency fund).
It can also be a benefit, though. If you have money you want to keep invested for a few months or a few years for a specific goal, putting it into a CD could help give you the willpower not to touch it since you won't want that penalty. It could save you from your temptation to spend the money on something else besides your goal.
CDs also can beat inflation -- and can be a better choice than mutual funds in some situations
Ramsey is also wrong for a few other reasons. For one thing, he says CD rates aren't high enough to keep pace with inflation. He points to average rates as an example. But there are plenty of CDs paying rates way above average and way above the current inflation rate.
The Ascent's list of the best cd rates has over a dozen options with yields in the mid-4.00% to 5.00% range. Since inflation data in March showed prices were up 3.5% year over year, it's easy to see that CDs are beating price increases right now.
And Ramsey's recommendation that you opt for a mutual fund instead of a CD doesn't make sense for everyone. You don't want to put your money into mutual funds if you have an investing timeline shorter than five years. The risk is too great that you'll time your investment poorly, suffer losses in a market crash, and have to sell before you can make them up.
CDs can have a place in your portfolio
If you have money you want to leave invested for three months to five years and you won't need to touch it for that time, a CD could be the perfect spot for it right now.
You can benefit from competitive yields and a guaranteed rate that won't go down if the Fed lowers rates later in the year as many experts predict.
So don't listen to Dave Ramsey about CDs. Instead, check out these great CD options to grow your money:
- Best 6-month CDs
- Best 1-year CDs
- Best 2-year CDs
- Best 3-year CDS
- Best 4-year CDs
- Best 5-year CDs
Or open one of the dozens of other certificates of deposit available from countless banks and issuers today. Just make sure the institution you choose is FDIC insured so your funds are protected. You won't regret it.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
FAQs
Dave Ramsey said investing in CDs isn't a winning strategy because of their similarity to savings accounts. But CDs offer benefits like encouragement to keep cash invested and the ability to keep a high APY for longer. There are CDs available now paying rates of 5.00% and higher.
What does Suze Orman say about CDs? ›
Suze Orman urges retirees to have around five years of living expenses set aside in safe savings, and she suggests putting some of this money into a CD. You can earn high rates without really taking on much risk when you open a CD as a retiree.
Why shouldn't you invest all of your savings in a CD? ›
The roles of CDs in your portfolio
They offer a guaranteed return over a set period with no chance of market-based losses. In exchange, they offer less liquid access to your cash than a savings account and lower long-term returns than the stock market. For this reason, CD accounts shouldn't take up all your money.
What is the biggest negative of putting your money in a CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
Should I put my money in CDs now? ›
If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
What does Warren Buffett say about CDs? ›
Warren Buffett famously deemed them “financial weapons of mass destruction,” and others compared them to taking out fire insurance on a neighbor's home. But the CDS market may be improving transparency in the stock and bond markets.
Why does Dave Ramsey not like CDs? ›
Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.
What is the catch with putting your money in a CD? ›
When you sign up for a CD, you agree not to touch the money for a set period of time but there are always unexpected expenses. If you access your money before the CD's term is up, you'll be charged an early withdrawal penalty, often worth a few months of interest.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Can CD accounts lose money? ›
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
CDs won't make you rich, but they can lock in safe returns. Say you're a retiree with $50,000 to invest. If you put $50,000 into a 1-year CD with a 5.00% APY, you'd have $2,500 more when your CD term expires, even if rates have gone down since. CDs are safe places to store short-term savings.
Should I put a million dollars in a CD? ›
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Why is a CD account bad? ›
Limited liquidity
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
Why would you not invest in CDs? ›
Many CDs require a minimum opening deposit, which could be a barrier for some investors. Treasuries (like T-bills) have similar rates to CDs, but are free from state income taxes. The stock market might be a better option if you seek greater returns and have a long time horizon.
Are CDs worth it in 2024? ›
CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor. Whether a CD is worth it right now also depends on why you're saving money, how soon you need your funds and whether rates rise or fall in the next year or five years.
Are CDs safe during a recession? ›
The Bottom Line. If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings.
Is it better to put money in a CD or the stock market? ›
Invest in CDs if you need stability
Because CDs offer a fixed return, they're the better choice if you'll need the money in the near future. For goals you have within the next five years, go with CDs over stocks. To give you a few examples, CDs can work well for money you plan to use for: A down payment on a home.
Are CDs a good investment for seniors? ›
One of the primary reasons many people choose to leverage CD s for retirement income is their fixed interest rate. Unlike stocks, where returns often fluctuate, CD s offer a predictable income stream. This stability is crucial in retirement, when you'll need to rely on your investments to pay for daily living expenses.
