Certificates of deposit (CDs) are one of several safe investment options that come with FDIC insurance coverage. CDs also offer other benefits, including a guaranteed rate of return. But there's some controversy over whether CDs are a worthwhile investment or not.
In fact, two big well-known financial gurus, Suze Orman and Dave Ramsey, actually have very different opinions about whether buying CDs can be a smart choice. It's clear, though, whose opinion makes the most sense. Orman is right, and Ramsey is wrong. Here's why that's the case.
This is what Orman and Ramsey think of CDs
Orman is a fan of CDs, saying that she believes they "make terrific sense."
Of course, she does have some caveats. She believes you should build an emergency fund before investing in a CD, and that CDs can be a good complement to a savings account but not a replacement for one. She specifically urges followers to put money into CDs only if they have funds to keep safe for a limited period of time, and she warns CDs aren't a substitute for putting your money into the stock market over the long term.
Ramsey, on the other hand, has described CDs as nothing more than "glorified savings accounts," and says CD returns are typically too low to make the investment worth bothering with. He suggests putting your money into a mutual fund instead of a CD.
Here's why Orman is right and Ramsey is wrong
Of these two different positions, it's clear that Orman's makes the most sense. And that's because she acknowledges there's a place in your portfolio for CDs under the right circ*mstances, while Ramsey overlooks this fact.
See, it typically doesn't make sense to invest money in the stock market (including in a mutual fund) that you'll need within five years or so. You typically need at least a five-year timeline to reduce the chances you'd have to sell and lock in losses if you happen to poorly time your investments and need money.
That's because stocks can lose money. If you invest in them with funds you need to access soon, you could find yourself losing a fortune in a market crash and not being able to wait out a recovery that would most likely make you your funds back.
Also, CDs aren't just glorified savings accounts because they usually (but not always) pay higher rates than savings accounts do (as Ramsey himself acknowledges). And they allow you to lock in those rates for the entire term of the CD, so you're protected if interest rates decline.
Right now, economic conditions are unusual and savings account rates and CD rates are pretty comparable, with some savings accounts actually paying more than CDs. But since the Federal Reserve is expected to reduce rates sometime this year, only a CD can guarantee you today's high yields for a fixed period of time -- you lock in the rate when you open one. Savings accounts, on the other hand, come with variable interest rates.
By not acknowledging that CDs can be the right choice for short- and medium-term investing, listening to Ramsey could cause you to miss out on an important chance to maximize your return on money you'll need in the coming three months to five years.
You shouldn't miss that chance. Instead, follow Orman's suggestion to put money into a CD once your emergency fund is complete (meaning you have three to six months' worth of expenses saved up) and once you have retirement savings underway. You can find some great CDs with rates above 5.00% today, so check them out and start investing if you have money you can tie up for a little while -- but not for too long.
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FAQs
Ramsey, on the other hand, has described CDs as nothing more than "glorified savings accounts," and says CD returns are typically too low to make the investment worth bothering with. He suggests putting your money into a mutual fund instead of a CD.
What does Suze Orman say about CDs? ›
But not everyone needs a CD, Orman and other pros say
“As great as the certificate offers are today, I don't want you putting all your emergency savings into a certificate. That's because if you need the money during the year, you will pay a penalty for making an early withdrawal,” says Orman.
Why is CD not a good financial investment? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
Are CDs good to buy during a recession? ›
During the Great Recession and its aftermath, the stock market went through turbulent shifts, resulting in great losses for some stockholders. CDs are one option that can help protect your investment from times of turmoil by providing a stable income.
Who is paying the most on CDs right now? ›
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| First National Bank of America | 5.05% | 18 months |
| Morgan Stanley | 5.05% | 2 years |
| LendingClub Bank | 5.00% | 18 months |
| Newtek Bank | 5.00% | 18 months |
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As for whether financial planners tend to recommend CDs for their wealthy clients? It depends. Certified financial planner Blaine Thiederman says CDs are low-risk but they also offer low returns. “If you're a high-net-worth individual, you've likely got a diversified portfolio already.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Should I put my money in CDs now? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
What is the biggest negative of investing your money in a CD? ›
Disadvantages of investing in CDs
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
Why am I losing money in a CD? ›
The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.
High-yield savings accounts, money market accounts and bonds can be good alternatives to CDs. Returns vary, but they're all considered low-risk investments. Regardless of where you keep your money, tending to your credit health is always a top priority.
Should I put a million dollars in a CD? ›
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Can banks seize your money if the economy fails? ›
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
Are CDs safe if bank collapses? ›
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
Can you get 6% on a CD? ›
Finding reliable 6% CD rates
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
Why are CDs no longer popular? ›
It's not just the physical attachment to the music that has been lost in the streaming era. In some ways, streaming has made the playlist more valuable than the music itself. Clicking like on a song provides significantly less emotional attachment for a consumer than buying and holding a CD, cassette or vinyl record.
Why doesn t Dave Ramsey like debt? ›
Ramsey has made it clear that he doesn't think there's ever a reason to borrow because of the financial danger that being in debt presents. "Debt always equals risk, and it's always dumb," he said.
Why is CD losing money? ›
A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest. CDs are generally low-risk and guarantee a fixed interest rate for the term. Early withdrawal penalties can sometimes reduce the principal, not just the interest.
