Why Invest In Certificates of Deposit (CD) When Rates Are So Low

Are you wondering why invest in certificates of deposit when rates are so low? Funny you should wonder because CD rates are finally ticking back up! In fact, both CD rates and Treasury bond yields are at the highest levels since 2007.

Higher inflation is here as we rebound from the pandemic lows. The Fed is raising interest rates multiple times as well. With risk assets like stocks and real estate slowing down, more people are looking to the safety of Certificates of Deposits, Treasury bonds, and municipal bonds to protect their wealth.

Roughly 5% of my diversified net worth is in certificates of deposit and other stable instruments currently yielding a blended rate of around 2% as of 2022. That is not a high rate. But it helps keep up with a normal level of inflation. Further, earning 2% is better than losing money during a stock market correction.

Now that CD rates and Treasury bond yields are back over 4%, it's time to buy CDs and Treasury bonds! Finally, we can optimize our cash yields as rich central bankers look to destroy global economies to tame inflation.

Here's a tip. There are times when the 10-year yield might be yielding less than a similar duration certificates of deposit. Look to invest in CDs to take advantage of such a spread. For example, the 10-year bond yield might yield 3.5%, while you can find 5-year CDs yielding 3.75%. This is a good opportunity to take advantage.

Why Invest In Certificates of Deposit

Here are a list of reasons why I invest in Certificates of Deposit, even when rates are so low.

  • As long as I'm making money, I will have a steady inflow of excess cash. Given I save over 50% of my after-tax income a month, I've always got to reinvest my cash flow. If rates go up, I'm just going to invest in a higher yielding CD for the longest duration possible. It's not like I'm one and done. The CD ladder is forever growing so long as I have income.
  • Accrued interest is accessible. In the event that I no longer have income and no longer have any savings, all the accrued interest earned from my CDs can be withdrawn and used penalty free.
  • CDs are 100% backed by the FDIC up to $250,000 per person on the account. I don't have to worry about some corporate CEO scandal or competitive threats blowing up my specific stock. As a result, I can focus on more productive things.
  • CDs offer a much higher interest yield than money markets. People complain about sub 2% CD interest rates when they have in effect been 5-10X higher than money market interest rates at 0.1%-0.3%. Money markets are the real travesty! I left the majority of my money in a money market for two months earning 0.3% a year which didn't feel optimal. CDs are better.
  • Diversification is important. Throwing 30% of my recurring savings in CDs is prudent, leaving me with 70% to invest in the stock market, the real estate market, or in myself. It was fun buying Facebook for a 30% gain. But I'm under no delusion I will continue to get lucky. I also keep my single stock investments to around $25,000 due to my risk metrics. I'm unwilling to invest in Treasuries because of how high they've risen already and their lower rates than CDs.
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More Reasons To Invest In Certificates Of Deposit

Here are even more benefits of investing in CDs even when rates are low.

  • Passive guaranteed income is becoming more valuable. Right now I've got about $2,800 a month in CD interest income. If I threw the entire $250,000 in an online savings account, my savings income would rise to to ~$3,000 a month. With $3,000 a month in guaranteed income for the next several years, I know I will not be begging on the streets if I fail at entrepreneurship.

Having the CD interest income safety net helps give me the confidence to create my own luck. Generating steady passive income is the key to financial freedom! Currently, I generate over $300,000 in passive income to take care of my family in expensive San Francisco.

Financial Samurai latest passive income investments streams 2022
  • I'm not greedy. Everybody says that inflation will eat away at my earnings. True, but my absolute capital is still going up with CDs. I'd rather make 1.59% on a CD than lose 5% in the stock market. Interest rates and inflation are tied together. You don't have high inflation without high interest rates and vice versa. Once you build your nut to live off, you will do everything you can to preserve it because it took so long to build.
  • Focusing on my X Factor. Given I've got the energy right now, I'm all about focusing on my X Factor. The X Factor is in all of us. We just have to unleash the beast. Often times, we can't because we're worried about school, money, family, etc.

By putting my money in certificates of deposit, I just don't worry about the funds at all anymore. I can then focus more of my time on my online work.

In fact, I published an instant Wall Street Journal bestseller, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. It is your secret weapon to getting rich and tackling some of life's biggest dilemmas. Given it is a bestseller, it will generate passive royalty income for years to come.

Rates Will Likely Stay Low For A While

It's important to get over the fact the absolute rates are still low. Look at things relative to other things when investing in certificates of deposit.

When I was investing in 4.5% CDs, people were laughing at me for being so conservative. Well they sure as hell weren't laughing after they lost 35-50% of the value in the stock market! in 2009 And they sure as hell weren't laughing when they lost their jobs due to the implosion in corporate earnings.

We are in an environment of incredible volatility and risk. Stock valuations are expensive. Rates are going up. Expectations are sky high the economy will continue to recover. Investing some money in certificates of deposit isn't a bad idea to preserve capital.

Furthermore, I'd much rather make 2% on my money than LOSE money in the stock markets. We saw temporarily losses in the stock market in March 2020. And the NASDAQ and S&P 500 corrected in 2022.

By investing in a CD, a AAA-rated municipal bond, or other safe assets, you can better preserve your capital.

Save Often And Aggressively

If you are a prodigious saver then certificates of deposit are a way to diversify your savings. My favorite bank for CDs is CIT Bank. Check out their no-penalty 11-month CDs and open an account with only a $1,000 minimum balance. The greatest benefits of this type of CD account is you can withdraw all of the money before maturity if needed without any penalties or fees.

Putting 5% of my net worth in certificates of deposit has enabled me to sleep better. $100,000 invested 7 years ago at a 4% compounded rate of return is now worth 32% more. I will continue to invest 5 cents for every single dollar I earn in CDs. I sleep well every night knowing my money will always be there and is getting the best relative return.

When it comes to investing in CDs, make sure you open an account with a trustworthy bank that offers the highest rates. I’ve found CIT Bank has the most competitive and highest CD rates nationwide. They are my go-to bank for buying CDs.

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Alternative To Investing In Certificates Of Deposit

Although I share why I invest in certificates of deposit, my main investment is in real estate crowdfunding for higher income. Real estate accounts for roughly $150,000 out of my estimated $300,000 a year in annual passive investment income.

Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then. 

Given interest rates have come way down, the value of rental income has gone way up. It now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity to buy real estate today.

Here are my two favorite real estate investing platforms

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds and eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most investors, I think it's wise to invest in a diversified real estate fund for passive income.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Cities like Charlston potentially have higher growth due to job growth and demographic trends.

I've personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. Certificates of Deposit are good for protection. With real estate crowdfunding, I'm looking to make a higher return.

Manage Your Finances In One Place

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. This way, you can optimize your finances. Certificates of Deposit are only one of many financial instruments to monitor.

Before Personal Capital, I had to log into eight different systems to track 32 different 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 when my CDs are expiring. My favorite thing to track is my net worth.

One of their best feature is the 401K Fee Analyzer. It is saving me $1,700+ a year in portfolio fees I had no idea I was paying. They also haven an incredible Retirement Planning Calculator. It pulls in real data to output as realistic a financial scenario as possible for your future.

I definitely recommend you run through your numbers, input different expense and income variables and see how you stack up. There is no better free tool online that I've found today. It only takes a minute to sign up.

Why Invest In Certificates of Deposit - to invest for the future
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Access The Best CD Rates

CIT Bank also offers the highest rate money market accounts and savings builder accounts I’ve seen.

It’s easy to set up a secure account online without ever needing to step into a branch. You can access your account info 24/7. And their customer service team is available to help with questions six days a week.

About the Author

Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent the next 13 years after college on Wall Street. 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 due to his investments. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom. You can sign up for his free weekly newsletter here. Why Invest In Certificates Of Deposits is a FS original post.

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61 thoughts on “Why Invest In Certificates of Deposit (CD) When Rates Are So Low”

  1. David Lodico

    Where in the hell are you finding CD rates around 2%?

    But I’m focused on investing in commercial real estate through real estate crowdfunding. CRE is the biggest laggard asset class now as w com out of the pandemic IMO.

  2. CD’s are now at 1%. Other than stuffing my mattress with cash, what is left for me to do to keep these funds safe. I’m in my mid 70’s.

  3. “Interest rates and inflation are tied together. You don’t have high inflation without high interest rates and vice versa.“

    Can we explore this statement further? I was under the impression that when the fed raises interest rates, it reduces the money supply due to less borrowing and curbs inflation by making money more scarce.

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