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Why A CD Is A Horrible Investment Right Now

6 December 2008 10 Comments

I frequently read on other blogs about why you should put money into CDs and how to create CD ladders and so forth. Well, I’m here to tell you that a CD is a terrible investment and why.

Low Interest Rates

I looked at my ING DIrect account to see what kind of CD rates they offer. The highest rate was 3.75%. Basically, if you go the CD option, you make a very small return that hardly covers inflation. There are plenty of dividend yields from conservative stocks that offer a better return.

Your Money Is Locked Up

Why would you lock up your money for 6 months up to several years, especially with a minimal return? The reality is that your money locked up for a minimal return is not a good decision. In most cases, taking your money out early will come with a penalty. As you continue reading, you will see there are plenty of other options that offer more flexibility and/or better returns.

The Inflation Risk

With locking your money up at a mediocre rate, you are at risk of actually losing money by having money locked up earning a return that is smaller than the rate of inflation. Doesn’t make sense, does it? The inflation risk is a real risk these days especially as our government spending and national debt continue to skyrocket. The US Dollar is at risk of losing its prestige more and more with our irresponsible government.

Better Options For Your Money

The attractiveness of CDs is typically the guaranteed return. If you want the guaranteed return, why not pay off your mortgage? You will get a higher return in most cases. If you have two mortgages, pay off the one with an adjustable and/or higher rate. This is money a much better investment than a CD.

If you do not want your money locked up, then look for high dividend yield stocks. Many stocks such as Philip Morris Int’l offer very low downside potential, decent upside potential, and a great dividend yield. Search for conservative stocks with stable earnings, strong balance sheets and a history of raising dividend payments. These stocks are a decent hedge against inflation also.

10 Comments »

  • Blake said:

    I guess the only good thing about CD’s right now is that they are about the best place to put your money and know that at some point in the future it will be worth more, although only nominally.

  • kevin duffey said:

    Are they the best place to put your money because the stock market is down big this year?

    Would you say they are the best place to put your money when the Dow was at 14000 and stocks were way up on the year?

    Stocks are less risky now than a year ago.

    While some additional downside might be likely, I try to stay long term focused.

  • Larry L said:

    Most of this blog post is just down right silly. Right now we are seeing a decrease in pricing. CD rates have been the highest in quite a few years. Banks want your money!

    Usually emergency savings and short term savings (ie less than 5 years) should be in CDs and/or equivalent. If you took your emergency savings and paid off your home mortgage while you decrease the principle (which is good), it is bad if you lost your job. Once a job is lost good luck getting a refi or HELOC.

    The inflation risk in the future while real will not occur overnight. Right now we are seeing and probably will see deflation at least for the next year or two. If you are so concerned about inflation get short term (less than 3 years) CDs. Also besides outright cash (which is actually more risky with inflation) what other options do you give to invest your money to hedge inflation that’s also NOT risky??

  • Nick W said:

    I keep my emergency savings at HSBC online. About the same as Orange Direct. The savings is right around 3% and they had an offer for a 4% 6 month cd. In order to maximize the interest on my emergency savings I figured I would put half in the 6 month cd. Small risk (chance I would have to withdraw early) for a slight gain in interest. Even withdrawing early and taking a one month penalty I would be getting about the same interest as if I had left it in the savings. I had all the account info that was necessary since I allready had an account, so it was easy to get an extra 1%.

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  • blogc2011 said:

    With locking your money up at a mediocre rate, you are at risk of actually losing money by having money locked up earning a return that is smaller than the rate of inflation. Doesn’t make sense, does it? The inflation risk is a real risk these days especially as our government spending and national debt continue to skyrocket. The US Dollar is at risk of losing its prestige more and more with our irresponsible government.
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