Finance guru Dave Ramsey has some pretty strong words when it comes to CD investing. Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates."
Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money. He suggests investing in mutual funds instead.
The reality, though, is that CDs are much more than glorified savings accounts and Ramsey is dead wrong in saying they don't have a place in your portfolio.
Here's why Ramsey is so wrong about CDs
There are a couple big problems with Ramsey's anti-CD position. First and foremost, CDs offer huge benefits that savings accounts don't.
In general, CDs provide higher yields than savings accounts
While that's not always the case, it's true often enough that you'll do better by opening a CD than just sticking your money in a savings account.
Ramsey even acknowledged this himself, but claims the rates aren't high enough to matter. Over the long term, though, the higher returns can add up. And why would you want to accept a lower rate when you could get a higher one? Can you afford to just leave money on the table?
CDs lock in your rate
With a savings account, rates are variable and thus could go down at any time. CDs allow you to earn a guaranteed rate for the duration of the CD term.
This could be an especially valuable benefit right now, as the best CD rates top 5.00%. You can lock in this great rate on a risk-free investment and won't be affected if the Federal Reserve lowers rates later this year.
If you put your money into savings, you might get a good rate right now. But if market conditions change, your rate will fall quickly and you won't be able to go back in time to lock it in. With a CD, you'll know upfront exactly how long you'll get to keep today's high rates.
CDs encourage you to keep your money invested
When you open a CD, you must leave your funds invested for the duration of the CD term, otherwise you're penalized in the form of losing some of your earned interest. This is referred to as an early withdrawal penalty. Ramsey says this is a downside for CDs, and it can be if you invest funds you should have kept accessible (like your emergency fund).
It can also be a benefit, though. If you have money you want to keep invested for a few months or a few years for a specific goal, putting it into a CD could help give you the willpower not to touch it since you won't want that penalty. It could save you from your temptation to spend the money on something else besides your goal.
CDs also can beat inflation -- and can be a better choice than mutual funds in some situations
Ramsey is also wrong for a few other reasons. For one thing, he says CD rates aren't high enough to keep pace with inflation. He points to average rates as an example. But there are plenty of CDs paying rates way above average and way above the current inflation rate.
The Ascent's list of the best cd rates has over a dozen options with yields in the mid-4.00% to 5.00% range. Since inflation data in March showed prices were up 3.5% year over year, it's easy to see that CDs are beating price increases right now.
And Ramsey's recommendation that you opt for a mutual fund instead of a CD doesn't make sense for everyone. You don't want to put your money into mutual funds if you have an investing timeline shorter than five years. The risk is too great that you'll time your investment poorly, suffer losses in a market crash, and have to sell before you can make them up.
CDs can have a place in your portfolio
If you have money you want to leave invested for three months to five years and you won't need to touch it for that time, a CD could be the perfect spot for it right now.
You can benefit from competitive yields and a guaranteed rate that won't go down if the Fed lowers rates later in the year as many experts predict.
So don't listen to Dave Ramsey about CDs. Instead, check out these great CD options to grow your money:
- Best 6-month CDs
- Best 1-year CDs
- Best 2-year CDs
- Best 3-year CDS
- Best 4-year CDs
- Best 5-year CDs
Or open one of the dozens of other certificates of deposit available from countless banks and issuers today. Just make sure the institution you choose is FDIC insured so your funds are protected. You won't regret it.
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FAQs
Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.
Why does Dave Ramsey not like CDs? ›
But when it comes to long-term savings, Dave Ramsey cautions against opening a CD. In fact, he insists that CDs are really nothing more than glorified savings accounts with slightly higher interest rates. The problem with those rates is that they don't do a good enough job of keeping up with inflation.
What does Suze Orman say about 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.
Why shouldn't you invest all of your savings in a CD? ›
The roles of CDs in your portfolio
They offer a guaranteed return over a set period with no chance of market-based losses. In exchange, they offer less liquid access to your cash than a savings account and lower long-term returns than the stock market. For this reason, CD accounts shouldn't take up all your money.
What is the biggest negative of putting your money in a CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
What does Warren Buffett say about CDs? ›
Warren Buffett famously deemed them “financial weapons of mass destruction,” and others compared them to taking out fire insurance on a neighbor's home. But the CDS market may be improving transparency in the stock and bond markets.
Do millionaires use CDs? ›
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.
What does Suze Orman recommend? ›
Live Within Your Needs but Below Your Means
Living within your needs but below your means is the golden rule of the Suze Orman budget.
Should I put my money in CDs now? ›
If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
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.
When you sign up for a CD, you agree not to touch the money for a set period of time but there are always unexpected expenses. If you access your money before the CD's term is up, you'll be charged an early withdrawal penalty, often worth a few months of interest.
Can CD accounts lose money? ›
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
How much is too much to put 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 you get rich off CD accounts? ›
CDs won't make you rich, but they can lock in safe returns. Say you're a retiree with $50,000 to invest. If you put $50,000 into a 1-year CD with a 5.00% APY, you'd have $2,500 more when your CD term expires, even if rates have gone down since. CDs are safe places to store short-term savings.
Why is a CD account bad? ›
Limited liquidity
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
Should I keep my money in a savings account or CD? ›
A savings account is a good choice if you need to access your money in the near future. Savings accounts are especially good for emergency funds because they can offer fast access to cash if you incur an unexpected expense. CDs, on the other hand, often charge a penalty to make early withdrawals.
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.
Does anybody listen to CDs anymore? ›
As for CDs, well, you might be surprised that people are still listening to them. In fact, I'm one of them. After being in a steady decline since 2000, CD sales are actually rising. Last, almost 37 million CDs were sold — up nearly three percent year over year.
