CDs have their benefits. But should you open one?
The money you have earmarked for your emergency fund should absolutely sit in a savings account. The reason? You need to have easy access to those funds in case an unplanned expense pops up.
But when it comes to additional savings you have beyond what you need for emergencies, you have options. You may be thinking of putting some of that money into a certificate of deposit, or CD.
The upside of opening a CD is getting to enjoy a higher interest rate on your money than what a savings account is likely to pay you. But CDs have their drawbacks, too.
For one thing, you must commit to locking your money away for a preset period of time. If you cash out your CD early, you'll be penalized to the tune of several months of interest.
And that's not the only problem with CDs. In fact, CDs have one big shortcoming that makes them a poor place for your money in the long run, according to financial guru Dave Ramsey.
Dave Ramsey isn't a fan of CDs
If you're saving for a near-term goal and want to give your money a little bit of an interest rate boost, a CD could be a good bet. Say you're accumulating funds for a down payment on a home, and you think it will take you two years to be able to buy. You might take your existing down payment funds and put them into a one-year CD to snag a higher interest rate than what a savings account might give you.
But when it comes to long-term savings, Dave Ramsey cautions against opening a CD. In fact, he insists that CDs are really nothing more than glorified savings accounts with slightly higher interest rates. The problem with those rates is that they don't do a good enough job of keeping up with inflation.
Anyone who's been balking at sky-high food and gas costs these days is familiar with the impact of inflation. But in recent months, inflation has soared to an extreme degree. Normally, an uptick in living costs is more gradual.
Still, over time, the value of a dollar is naturally apt to diminish, so if you're saving for a far-off milestone like retirement, you'll need to invest your money in a manner that can at least keep up inflation. In that regard, CDs are extremely likely to fall short.
A better bet? Invest your money in an IRA or a brokerage account. The returns you're able to snag in one of these accounts could far surpass what a CD will pay you -- even during periods when CD rates are considerably higher than what they look like today.
Don't stunt your savings' growth
You may decide to put some money into a short-term CD. But don't rely on CDs as a means of growing long-term wealth. It's a move that could leave you cash-strapped later in life, and that's a dangerous situation to be in.
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FAQs
Let's be real clear here, CDs are nothing more than glorified savings account with slightly higher interest rates. But even those rates aren't enough to keep up with inflation, which makes things more expensive over time. That's not a winning strategy for long-term investing, people!
Does Dave Ramsey recommend 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.
Is it a good idea to put money into a CD? ›
Is it worth putting money into a CD? For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.
What are the 4 funds Dave Ramsey recommends? ›
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.
What is a disadvantage to putting your money into a CD? ›
Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.
What does Suze Orman say about CDs? ›
Orman is a fan of CDs, saying that she believes they "make terrific sense." Of course, she does have some caveats. She believes you should build an emergency fund before investing in a CD, and that CDs can be a good complement to a savings account but not a replacement for one.
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.
Is it smart to put money in a CD now? ›
With savings accounts offering record-high returns today over 5%, now's the time to take advantage before those rates go down. And with a CD specifically, savers can lock in today's high rate despite any future cuts from the Fed.
What is the biggest negative of investing your money in a CD? ›
Disadvantages of investing in CDs
As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty. The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD.
Are CDs safe if the market crashes? ›
Market Crashes and CDs
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
There's an 80-20 rule for money Dave Ramsey teaches which says managing your finances is 80 percent behavior and 20 percent knowledge. This 80-20 rule also applies to constructing a healthy life. Personal wellness is 80 percent behavior and 20 percent knowledge.
What does Dave Ramsey say is the best investment? ›
Playing longball and investing consistently. Mutual funds are the way to go. They cast a wide net across many companies, helping you avoid the risks that come with the trendy stuff, like crypto. Just remember, match beats Roth beats traditional on figuring out where to invest for retirement first.
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.
Why am I losing money in a CD account? ›
Early Withdrawal Penalties
The most common way people lose money through a CD account is by withdrawing their funds before the term ends.
Should I put my money in CDs or stocks? ›
Because CDs offer fixed interest rates, they're better for short-term financial goals where you don't want any risk of losing money. Stocks are better for financial goals that are more than five years away, such as retirement.
Do millionaires use CDs? ›
As for whether financial planners tend to recommend CDs for their wealthy clients? It depends. Certified financial planner Blaine Thiederman says CDs are low-risk but they also offer low returns. “If you're a high-net-worth individual, you've likely got a diversified portfolio already.
Are CDs good to buy during a recession? ›
During the Great Recession and its aftermath, the stock market went through turbulent shifts, resulting in great losses for some stockholders. CDs are one option that can help protect your investment from times of turmoil by providing a stable income.
Who has the best paying CDs right now? ›
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| First National Bank of America | 5.05% | 12 months |
| First National Bank of America | 5.05% | 18 months |
| Morgan Stanley | 5.05% | 2 years |
| LendingClub Bank | 5.00% | 18 months |
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