CDs have their benefits. But should you open one?
Key points
- With a certificate of deposit, you commit to keeping your money in the bank for a specific period of time.
- While CDs offer higher interest rates than savings accounts, they're not the best solution as a long-term investment.
The money you have earmarked for your emergency fund should absolutely sit in a savings account. The reason? You need to have easy access to those funds in case an unplanned expense pops up.
But when it comes to additional savings you have beyond what you need for emergencies, you have options. You may be thinking of putting some of that money into a certificate of deposit, or CD.
The upside of opening a CD is getting to enjoy a higher interest rate on your money than what a savings account is likely to pay you. But CDs have their drawbacks, too.
For one thing, you must commit to locking your money away for a preset period of time. If you cash out your CD early, you'll be penalized to the tune of several months of interest.
And that's not the only problem with CDs. In fact, CDs have one big shortcoming that makes them a poor place for your money in the long run, according to financial guru Dave Ramsey.
Dave Ramsey isn't a fan of CDs
If you're saving for a near-term goal and want to give your money a little bit of an interest rate boost, a CD could be a good bet. Say you're accumulating funds for a down payment on a home, and you think it will take you two years to be able to buy. You might take your existing down payment funds and put them into a one-year CD to snag a higher interest rate than what a savings account might give you.
But when it comes to long-term savings, Dave Ramsey cautions against opening a CD. In fact, he insists that CDs are really nothing more than glorified savings accounts with slightly higher interest rates. The problem with those rates is that they don't do a good enough job of keeping up with inflation.
Anyone who's been balking at sky-high food and gas costs these days is familiar with the impact of inflation. But in recent months, inflation has soared to an extreme degree. Normally, an uptick in living costs is more gradual.
Still, over time, the value of a dollar is naturally apt to diminish, so if you're saving for a far-off milestone like retirement, you'll need to invest your money in a manner that can at least keep up inflation. In that regard, CDs are extremely likely to fall short.
A better bet? Invest your money in an IRA or a brokerage account. The returns you're able to snag in one of these accounts could far surpass what a CD will pay you -- even during periods when CD rates are considerably higher than what they look like today.
Don't stunt your savings' growth
You may decide to put some money into a short-term CD. But don't rely on CDs as a means of growing long-term wealth. It's a move that could leave you cash-strapped later in life, and that's a dangerous situation to be in.
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