Why Is A Certificate of Deposit (CD) A Better Investment Option?
A certificate of deposit, most commonly known as a “CD,” is an incredibly safe and easy way to sock away money and earn a little interest at the same time. But we’ll be frank here. You’re not buying a CD because you want to get rich quick. You’ll never see a newscast about the guy who bought a CD and three years later used the proceeds to move to the Bahamas. You’ll never see a late night infomercial with a man in a loud suit screaming about how his book on buying CDs will turn you into the next Trump. You’ll never cash out a CD and then all of a sudden be able to fill your vault with your winnings and dive into a pool of money, Scrooge McDuck style.
What you will do with CDs, however, is always make money. That’s something you can’t say with pretty much any other investment. Stocks plummet overnight. Real estate markets crumble faster than you can say “housing bubble.” But when you cash out a CD, you’ll get more money than you put in — guaranteed.
What a CD lacks in dazzling returns, it more than makes up for in security. While there are certainly other less risky investments, a CD has distinct advantages that make them right for a wide swath of the public: the people who just want to get back a little more than they put in, without having a conniption fit every time the market dips:
CDs are safe, safe, safe
Think the U.S. government is going to be overthrown anytime soon? If not, then your CD is secure. Like any other deposit with a federally insured bank (up to a quarter million dollars), CDs are backed by the full faith and credit of the United States.
What does this mean? As long as the government is functional, and we don’t once again find ourselves under British rule, experience a disruptive alien invasion, or the government otherwise loses its ability to pay back debts, a CD holder is entitled to their money back from a CD, no matter what.
That means even if the bank that issued the CD goes the way of the dodo. Even in case of bank failure, the depositor can still get their cash out with interest. Thanks to that government insurance, not a single depositor has lost their money from bank failure since the Great Depression. And as long as the U.S. government stays in power, CDs will remain completely risk-free.
CDs have their interest rate locked in
Companies can tweak their stock dividend payouts when they see fit. But once a CD is locked in, that’s the interest that will be paid out on maturation. No going back on it. Once you and the issuing bank have agreed on the rate, when you cash out down the road, that’s what you’re going to get.
There are times when this can be an incredibly advantageous situation. During the economic fallout of 2008, cash-strapped banks were offering CDs at unusually high rates, sometimes as much as five percent. Take a look at how much it’s changed since then, from the rate table below.
Contrast this with the stock market that year. In 2008 the S&P 500 index lost a whopping 38.5 percent of its value. That generally accepted barometer of the market at large took five years to recover, not meeting its October 2007 value until late 2013. So a person who’d just put their money in a CD and done absolutely nothing while also risking absolutely nothing would have come out better, assured that at the end they’d get their money back, and then some.
With a CD, there’s no stress
The absolutely wild ride the market has taken over the last six years has given more than a few investors more than a few gray hairs. While stock pickers have ostensibly made their money back and then some on this current bull run, the market still remains as comparably erratic as the day is long. Compared to what, exactly? Compared to the slow-and-steady payouts of stable investments like CDs.
Someone who’s put part of their nest egg in a CD doesn’t have to have a freakout every time troubling news comes out of Wall Street (which is to say, constantly.) Someone who’s put their money in a CD doesn’t have to worry about anything. Once they enter that maturation date into their calendar, there is absolutely zero to worry about.
Stocks markets crash. Real estate bubbles pop. Gold and silver prices tank after enough people quit thinking that catastrophic economic collapse is upon us (really). But once a CD rate is locked in, it’s good to go, and no matter what happens out there (aside from the aforementioned complete collapse of society, which will bring a few problems outside of CD rates to worry about) your CD is safe as milk.
CDs make more money than a savings account
A lot of the advantages described herein seem to meet the same criteria as a savings account. So why buy a bank-backed CD when one could just sock their cash in a bank-backed savings account?
Because even though the amount is small, CDs almost always have a better rate than a savings account. It’s true a CD isn’t going to make you rich — tomorrow. But over enough time those stray percents can add up, and they’re certainly going to add to grow the nest egg more than a savings account, whose interest is comparably tiny.
CDs pay more because you usually can’t cash them out without paying a fee. Once socked away, that CD value can’t be un-socked. But if you’re truly putting away the money for retirement or another long-term goal, dipping in shouldn’t be an issue anyways.
In that way, the CD is like a piggy bank you can’t break. Except it’s a piggy bank that gets bigger the longer you don’t touch it.
CDs might not make you rich overnight, but if you play them right, all you have to do is sit back, relax, and know that you’ll always be getting richer — no matter what crazy and unexpected weirdness happens out there.
Veronica is a staff writer for MyBankTracker. She is an expert in investing, consumer bank accounts and retirement.