Are CDs a Good Investment?

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Hey Taylor: What are your thoughts on buying CDs? I know a couple of people who recommend them, but one of them is my father and I sometimes wonder if his strategies are of this time. What do you think? — Stan

Hey Stan: Someday my kids will be saying the same things about my advice. Your father isn’t entirely off base, though I will say CDs aren’t my top choice for earning returns. Their usefulness somewhat depends on the other assets you have and what you’re looking to do with your money.

Certificates of deposit are really safe, so they’re worth looking at if the goal is to diversify your portfolio with low-risk holdings. They’re usually insured up to $250,000 and you don’t have to deal with big market fluctuations or rate changes since the investment is relatively short term.

If we’re talking about making more money over time, I think you’re better off putting your funds into a solid, dividend-paying stock. If you stack the two up next to each other, the dividends will likely equal or exceed the interest payments from a CD, and your stock value goes up as the company’s value increases. As long as you don’t panic and let the shares ride, you’ll have a better shot of beating inflation in the market.

Of course, stock prices go up and down with market volatility. Your CDs are on firmer ground and should also edge out inflation as long as you’re willing to go with terms upwards of three years. If you don’t have much in the way of liquidity, CDs become a little scarier once you start thinking about what terms will get you the best rate. CDs usually give you a better rate than you’ll get with a standard savings account, but you won’t have access to that money for a stretch.

Some people combat the liquidity problem by “laddering” their CDs—buying a one-year term, a two-year term, a three-year term, and on through five years. As each deposit matures, the money then gets rolled into a new five-year CD. Eventually, you have multiple longer-term CDs with one maturing each year. It’s a bit of a process, but it does help with accessibility. As long as you have enough available cash, there’s nothing wrong with putting some of it into a CD at a good rate.

While CDs may not be the best cash investing option for some people, it may work well for others. They're not a terrible route by any means! It's all about finding what fits into your financial plan, making sure you're 100% comfortable with your investment opportunities, and understanding where you're putting your money. Happy investing!