Are you wondering whether to invest in CDs? CDs are Certificates of Deposits, which are FDIC-insured for up to $250,000 per person. As the stock market and real estate market roar to record highs post pandemic, interest rates are also ticking higher. As a result, more people are logically wondering whether investing in CDs is a good idea.
For the risk-free asset portion of my net worth, I dump most of my money into long term CDs and a high-yield online savings account. 40% of my net worth is in real estate. I love real estate the most because I like having a real asset which is tangible, produces income, and provides a hedge against inflation. 30% of my net worth is in stocks. And the rest of my net with is in my business and other alternative assets.
A CD is one of the purest sources of passive income generation. I literally don’t have to do anything for the interest income earned after I decide on a CD. It just compounds and automatically renews to another similar duration CD after the initial period is over. The only problem over the years is that CD interest rates have declined to levels where the returns haven’t been that enticing.
QUESTIONS TO ASK BEFORE INVESTING IN A CD
CDs are like bonds that do have a principal value. You just don’t see the day to day movements, which makes them seem like they are safer investments than fixed income. The truth of the matter is, they have risk but it’s not much if you do the right things.
Ask these questions first if you want to invest in CDs.
* Is the bank FDIC insured? If so, you can sleep sound at night knowing that $250,000 per single account is guaranteed by the government.
* Are there any upcoming purchases you will have during the duration of the loan?
* What are the penalties for early withdrawal?
* Do you have enough liquid cash in reserves (emergency fund as some call it) to keep me liquid and feeling comfortable?
* Do you have a propensity to spend idle cash in your bank on things which don’t help you build wealth eg cars, clothes, shoes, jewelery, and other material things.
* Do you plan to stay at your current job for the foreseeable future, thereby allowing you to keep saving money every month?
* What is your risk appetite for stocks, bonds, and other asset classes?
* Do you have a comfortable asset allocation in place where your principal will be protected during downturns, and you’ll be able to make money during upturns?
* Are there other asset classes that are more tax advantageous with similar risk and returns?
* Do you believe that the inflationary environment will be relatively benign in the next year or two?
SAVE AND SAVE SOME MORE
Ask yourselves all of the above questions and realize that saving money in CDs is never a bad thing. It might be the suboptimal investment, but it is not bad. You can literally calculate how much cash you have after a certain amount of years, which provides a lot of comfort for many people. What’s bad is letting your money sit in a <1% savings account and spending the money on something stupid like a car.
If you don’t want to invest in CDs, you can always pay down debt. It can be mortgage debt, credit card debt, a personal loan, student debt, and so forth. Try and pay off your highest interest rate debt first. See: Ranking Debt Types From Worst To Best
I’ve often done sub-optimal things with the money that just sits in my bank account. For example, I’ve bought luxury automobiles, motorcycles, multiple suits and expensive rare watches. I’ve made loose $200-$500 poker calls because of a large bank roll. Further, I’ve invested in an iffy private company with no relevant experience. I’ve also done plenty of dumb things as well which have lost me a ton of money. In other words, sometimes I need to protect myself from myself!
Every year you keep your cash in a savings account is another year you lose out on a higher interest return. If you plan to save and work for a while, you don’t have to be afraid of not being liquid enough because you will always have money coming in. The main thing is to not stop saving. It’s what sets you free.
Recommendation For Your Savings
Take a look at CIT Bank for one of the highest yielding savings account online. Their rates are regularly much higher than comparable banks.
CIT Bank also offer an 11-month penalty-free CD at a competitive rate as well. I haven’t seen another online bank that has matched their rates in a long while. Invest in CDs for peace of mind.
Recommendation For Manage Your Money
The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing. I can also check how my net worth is progressing. It’s great!
The best tool is their Portfolio Fee Analyzer. It runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success.
Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
About the Author:
Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $300,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.