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Don’t Bother With Certificates of Deposit

By Erik Folgate

I don’t think I have ever talked about CDs on this blog in the psat, and that is for a reason.  I don’t like them.  With the advent of online savings accounts and well-performing mutual funds, CDs do not offer many advantages over other financial products.  Basically, they are a financial product that banks use in order to keep your money for longer than you want.  They may have been a good short-term financial investment product before the internet and the rise in popularity of mutual funds, but now they are outdated, in my mind. 

People with low tolerances of risk are usually most attracted to certificates of deposit, but there is a better option with the same level of risk.  Online savings accounts now yield a 4-5% return, and some of them offer ATM cards to make withdrawals and deposits.  I use ING Direct, and their transfer time is very speedy.  It usually takes no more than 2 business days to get money into the account.  I know that HSBC Direct offers an ATM card, but I am unsure if that is a Debit Card or just an ATM card.  It would take a one year to two year commitment to a CD in order to receive those types of rates.  

If you have a little more tolerance for risk and you want to park some short term investment money for longer than a year, than mutual funds are the best option in terms of rate of return.  You can find numerous mutual funds with low fees that yield anywhere from 8% – 15% over a 2 to 5 year period.   With mutual funds, you can’t be scared if you see your account lose money.  I’m going to do a post about the foolishness of trying to time the market.  It is not something that you want to practice, because just like in Vegas, the house always wins!  Except in this case, the house is the stock market. 

More Disadvantages to CDs….

  • Their rate of return is not competitve with other viable short-term investment options. 
  • There are penalty fees associated with withdrawing the money before the specified maturity date. 
  • Due to the associated fees, it reduces the liquidity of your money in case of emergency
  • If you do not tell the bank what to do with the CD at least 10 days before the maturity date, then it will automatically roll the CD into another maturity term. 

Can you tell that I think CDs stink?  Look into online savings accounts.  If you are worried about it taking too long to transfer the money, then look into online accounts that offer bank cards for easy withdrawal.  Otherwise, be a part of the trend and start saying “NO” to CDs.  Maybe it will force corporate banks to be more creative or less stingy with their rates of return on savings accounts. 

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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