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Right now, certificates of deposit (also known as CDs) can seem like a really good investment. CDs are insured by the FDIC, so they are safe. They are widely available and do not demand minimum investment. You can also get rates higher than 5.00%.
However, not everyone should invest, even if it seems like a smart idea at first. It’s possible that there are more reasons not to buy a CD than to do so. Take a look at these five reasons why CDs aren’t worth it.
5 Reasons Reluctance to Buy CDs Over 5.00%
1. There are better investments out there
According to Ascent’s Guide to the Greatest CD Rates, it’s fair to say that many CDs are now paying rates in excess of 5.00%. What, perhaps, is more profitable than doing 5.00%? Earning 10%.
If you create a brokerage account and invest in an S&P 500 index fund, you can safely expect a 10.00% annualized return. Of course, investing always has the potential to lose money, with a little extra risk involved. But under the right circumstances, the risk is actually quite low.
When you invest in the S&P 500, you’re essentially betting on the U.S. economy, a financial index made up of the 500 largest U.S. companies across all industries. Additionally, S&P funds have a track record Really reliable in the long run. If you have the patience to wait out a downturn, you are less likely to lose money than if you were unlucky enough to invest during a terrible time.
If you don’t plan to use your money for a few years, investing in an S&P fund with a higher return than a certificate of deposit (CD) is probably a wiser financial decision.
2. You don’t get any tax benefits
Another reason to avoid CDs is if you’re not comfortable with the risk of an S&P fund or if your investment schedule isn’t aligned: You won’t get the tax benefits when you buy them; But, if you want to buy T-Bills.
You can buy T-bills, also known as Treasury notes, with confidence because they are backed by the US government. Currently, the prices they offer are comparable to CDs and like CDs, the rates are fixed for the duration of the term. The interest you earn from T-bills, however, is not subject to state taxes. You pay taxes on the money you earn from the CD.
Why contribute to the government coffers if there is no need?have to? Treasury bills can be slightly more complicated to buy since you have to purchase them at auction, but it’s not difficult to do that online. Just go to TreasuryDirect.gov to get started.
3. You have to lock up your money
With CDs, you have to invest for the entire term of the CD to avoid penalties. Otherwise, you are losing your liquidity for a measly 5.0%. You pay a fee to break your CD early if you need the money for something like an unexpected expense.
Losing your financial access and running the risk of fines is serious business. Make sure you won’t regret it before you even consider making a decision. Investing in certificates of deposit is a terrible idea if you think you’ll need the money before the CD matures.
4. Returns aren’t that impressive after inflation
Now, when you look at that 5.00% CD rate, you might be thinking that excellent returns are worth sacrificing your ability to access funds. But remember that currently, inflation is depreciating the value of your money. And once you buy your CD, it stays that way.
As of April 2024, the US inflation rate was 3.40%. Just to stay ahead, you have to make so much money. Thus, a 5.00% CD doesn’t really add that much to your purchasing power. After accounting for inflation you are earning just 1.60%. It’s not that surprising when you put it that way, and it’s probably not worth sacrificing your liquidity.
5. Savings accounts are offering competitive yields right now
And finally, the simple fact that rates on savings accounts are currently on par with CDs. It is certainly true that interest rates on savings accounts can fluctuate. Nevertheless, the Federal Reserve may decide not to cut interest rates for some time as inflation remains above the Fed’s 2.00% target rate. Therefore, it is not reasonable to expect a significant drop in savings account returns anytime soon.
CDs aren’t the best option in every situation, as there are other ways to get the same returns while you have your money in hand. Avoid making the mistake of investing in something that doesn’t make sense to many because of high rates. Save, choose a T-Bill or invest your money into a brokerage account instead.
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