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.
FAQs
Also, CDs aren't just glorified savings accounts because they usually (but not always) pay higher rates than savings accounts do (as Ramsey himself acknowledges). And they allow you to lock in those rates for the entire term of the CD, so you're protected if interest rates decline.
What does Dave Ramsey say about CDs? ›
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.
Why are CDs not a good 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 the biggest negative of putting your money in a CD? ›
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
What is the main drawback of a CD over a savings account? ›
1. Early withdrawal penalty. 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 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.
What if I put $20,000 in a CD for 5 years? ›
How much interest would you earn? If you put $20,000 into a 5-year CD with an interest rate of 4.60%, you'd end the 5-year CD term with $5,043.12 in interest, for a total balance of $25,043.12.
Do financial advisors make money on CDs? ›
Your financial advisor receives a percentage of any commissions or charges for CDs.
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.
Can I lose money in a CD account? ›
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.
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 6 months | 2.53% | $127.17 |
| 1 year | 2.57% | $260.05 |
| 18 months | 2.18% | $332.10 |
| 2 years | 2.09% | $426.48 |
3 more rowsAug 8, 2024
You're guaranteed to earn hundreds of dollars
But an 18-month CD with a deposit of $5,000 can do just that. Whether you lock in a rate of 4.50%, 4.75%, 5.00%, or somewhere in between those ranges, you'll earn upwards of $300 in interest once the account has matured.
Is it worth putting money in a CD right now? ›
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
Why would a person use a CD instead of a regular savings account? ›
Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.
Why shouldn't you invest all of your savings in a CD? ›
Low overall return. Once you factor in inflation and taxes, a CD's return is relatively low compared to many other investments. Reinvestment risk. There is the risk that, after your CD matures, you won't be able to reinvest it at an equal or higher rate.
Is a CD safer than a money market account? ›
Explore Your Savings Options With PNC Bank
Money market accounts and CDs are both relatively safe investment options for those looking for a place to deposit cash. With fixed interest rates and FDIC insurance, CDs can be an excellent option for funds you don't anticipate needing right away.
Are CDs a good investment for retirees? ›
One of the primary reasons many people choose to leverage CD s for retirement income is their fixed interest rate. Unlike stocks, where returns often fluctuate, CD s offer a predictable income stream. This stability is crucial in retirement, when you'll need to rely on your investments to pay for daily living expenses.
Are CDs worth putting money in? ›
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.
How much would $100,000 CD make in a year? ›
1-year CD returns on $100,000
At 5.0%: $5,000, for in a total balance of $105,000 at the end of the term. At 5.5%: $5,500, for in a total balance of $105,500 at the end of the term.
