What's a CD & Should I Buy One

July 11, 2018

I learned this as a young pup and it's very important. In finance speak, a CD is a certificate of deposit. You give a bank some money, they lock it up for a period of time (6 months - 5 years) and at the end of the lockup you get your money back with interest.

 

In the days before online banks, a CD wasn't the worst idea in the world. You got a higher rate of return than you would get in the bank and if you didn't need the money today, it was a great way to maximize your interest while keeping your money safe. CDs can't default.

 

But today, CDs are a terrible investment. Yes, this is a double entendre. Both music CDs and banking CDs are a terrible investment. 

 

 

 

In 99% of scenarios CDs are a poor savings option. The only time a CD is the right move is if a client is incredibly wealthy, liquid, and can perfectly time the purchase of a long term CD prior to the next stock market collapse. The problem is, anyone who is wealthy and liquid enough to warrant the purchase of a CD has a multitude of superior investment options at their fingertips.

 

CDs do not make sense because they pay less than 1% more than the top online high yield savings accounts. But for that extra return, they lock up your money. If you need to remove your money early, you will be assessed a penalty that in many cases will be more than the interest the CD pays. For anyone thinking about a CD, I would instead recommend a combination of the following: high yield savings account, muni bonds/muni bond ETFs, short duration bonds/short duration bond ETFs.

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