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.
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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.
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.
Is it better to put money in a CD or savings account? ›
Savings accounts are especially good for emergency funds because they can offer fast access to cash if you incur an unexpected expense. CDs, on the other hand, often charge a penalty to make early withdrawals. To get the most out of savings, place your money in a high-yield savings account.
Why are CDs not a valuable investment? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
What is a disadvantage to putting your money into a CD? ›
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.
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 money 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.
Should I put my retirement money in a CD? ›
CD s offer stable, predictable returns and attractive interest rates. By carefully balancing the benefits and drawbacks, you may successfully leverage CD s for retirement income. While CD s may be a valuable component of your retirement investment portfolio, they should be part of a broader diversified strategy.
Do you get taxed on CD interest? ›
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.
Should I put all my money into a CD? ›
Bottom Line. CDs can be a safe way to earn a little interest on your savings over a set period of time. But don't put more money in CDs than you can afford to lose access to for the length of the CD's term. Once your money is in a CD, you generally can't touch it without penalty until it matures.
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.
Why are CDs a deterrent to spending? ›
However, that can also be a useful feature for some savers who worry that they won't have the discipline to avoid tapping into their savings. The fixed term of a CD—and the associated penalty for early withdrawal—provide a deterrent to spending that regular savings and money market accounts do not.
How much money should I put in a CD? ›
Don't put cash into a CD that you'll need for emergencies. Many CDs have a minimum deposit amount, usually around $500. Don't put more in a CD than you feel comfortable parting with.
Is it safe to put money in CDs right now? ›
Bottom line. While we don't yet officially know when, and by how much, interest rates could drop in 2024, it's safe to say we've reached peak savings rates today and now is the time to lock one in with a CD.
Can you live off CD interest? ›
That said, CD rates and bond yields remain only slightly higher than the current rate of inflation (which was roughly 3.2 percent as of late 2023), making it challenging for most retirees to generate enough income from their fixed income investments to live off their interest alone.
Is it better to have one CD or multiple? ›
Having multiple CDs can be a great way to diversify your portfolio without sacrificing as much liquidity. Risk is low, and CDs provide steady returns. Just know that owning too many CDs could cut you off from other high-return investments. Investing is one part of the financial journey.
How much is too much to put in a CD? ›
Ensure your CD deposit and the expected interest will total less than the $250,000 limit. Open CDs at different banks or credit unions. This approach might take more work, but you can utilize CDs at different rates and terms.
Is it bad to put all your money in savings? ›
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account. After all, most high-yield savings accounts limit withdrawals to only six per month, so a checking account is typically a better place to store your spending cash.
Should I put all of my savings into investments? ›
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
