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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