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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