Does It Ever Make Sense To Buy A Certificate of Deposit?
Brenton Harrison, CFP?, CLU?, CSLP
Investopedia Top 100 Advisor | Host of New Money New Problems Podcast | Financial Advisor at New Money New Problems
Something weird has been happening with banks recently.
Over the past year or so, I’ve come across multiple clients and friends who, for some reason or another, have had an influx of cash.
Maybe they sold a home and kept some of the proceeds.
It could be a bonus from their job they weren’t expecting.
And in years past, these people would likely have kept this money in savings until they had an idea of what to do with it.
But recently when I come across them, they’ve done something with their money that’s straight out of the 1980s … they purchased a Certificate of Deposit (CD).
Yes, your grandpa’s favorite investment tool is apparently back.
If you’re not aware, CDs are contracts between a client and a bank where the client agrees to lock up their money for a set period of time (e.g., 6 months, a year) in exchange for receiving a fixed interest rate.
The downside? If you need to access your money early, CDs charge a penalty for withdrawing funds before the period expires.
CDs were extremely popular in the early 80s, when houses cost $7 and rates for these instruments climbed over 15% (!!!!)
But I haven’t seen them used this frequently in years … something is up.
For a younger investor (meaning more than 10 years out from retirement), I’m typically not a fan of CDs.
Why?
Because interest rates for high-yield savings accounts are typically very close to what you can get from a CD, all without locking up your money. Why sign a year long contract to get 5% on your money when you can get 5% elsewhere with no restrictions?
But it doesn’t answer why banks are suddenly pushing them on their customers. So this week in the episode, we dig into why a bank might tell you about a CD, when they have a perfectly good high-yield savings account they neglected to mention.
Tune into the full episode using the link below!
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