Should you put your money in a long-term CD or invest it? Here's what to consider (2024)

FAQs

Should you put your money in a long-term CD or invest it? Here's what to consider? ›

Bottom line. When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.

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.

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.

CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.

Cons of Long-Term CDs

Below are the drawbacks of long-term CDs: Early withdrawal penalties: If you end up needing to take money out of your long-term CD before the term is over, you will likely get hit with early withdrawal penalty fees. Deposit limitations: Minimum deposit requirements to open a CD can vary.

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.

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.

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.

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.

Inflation isn't factored in with a locked APY

Whenever you invest in a CD, you lock in the interest rate for the term. If inflation rises during the term, your APY won't be adjusted, so an interest rate that once seemed stellar might be lackluster after accounting for inflation.

Are CDs worth it in 2024? ›

CD Investing Pros and Cons in 2024

CDs can be a smart financial move at times, but not so great at others. In the past, other investments earned higher rates than even the best CDs could earn. But, in today's high-interest-rate environment, CDs might be a great option.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

CDs are good for medium-term savings goals. The best CD rates tend to be at online-focused institutions. High-yield CDs in recent years have reached 4% to 5% annual percentage yields, which might be enough to keep better pace with inflation than regular savings accounts can.

The drawback is that interest rates can change in the future, depending on the actions of the Federal Reserve. While CDs maintain a fixed interest rate, the interest rate you receive from a high-yield savings account could increase or decrease over time.

Use Multiple CDs to Manage Interest Rates

Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.

One benefit to opening a long-term CD is that you'll have a fixed interest rate for a longer timeframe than a short-term CD. This means you'll earn more interest on your account because you'll have it locked in longer. You also won't have to worry as much about CD rate fluctuations.

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.

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.

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.