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Should I buy a CD?

Should I buy a CD?

July 05, 2023

Back in the mid 90s, when I was entering college, I received a very wise bit of financial education from my grandfather.  “Use their money…to make money.”  As vague as this could be, I understood.  As I entered college, although education expenses were significantly lower than today’s prices, I had the same options that many kids have today….student loan choices.  My grandfather was saying that I should “take the loans.” 

 

In 1996, when I entered college, I had saved enough to pay my way, but taking my grandfather’s advice, I took the loans and invested $5000 in a 4 year CD at 7.75%.  I repeated this pattern every semester through the 4 years of my Bachelors Degree.  Why?  To understand this, we have to step back to understand why a person would consider a CD as an investment. 

Let’s break it down:

  1. In the mid 90s, interest rates and stock market rates are nearly identical to today’s environment of choices. (There is uncertainty in the stock market environment and the FED is playing with interest rates to stabilize inflation results.)
  2. Risk – do you take risk? (I was borrowing money on a 4 year window…lose it or guarantee gain)
  3. Risk – at 4% or 5% growth….what am I leaving on the table? (Although, this growth is attractive right now, what are we missing out on?)
  4. As we stabilize from an inflationary market, is an investment locked in for 6 -12 months a wise choice?
  5. Have you evaluated all the options? (Annuities, stocks, mutual funds, IRAs, etc.


    CD rates over the last 16 years have been bouncing off of zero.  As of late, interest rates have made Certificate of Deposit accounts appear more attractive.  As I drove past my local bank this morning, I saw 6 month CD options at 5.1% and 11 months at 5.4%.  How does one deny this comfortable rate?  There is an old saying that goes, do not go to the grocery store on an empty stomach.  Why?  The theory behind this statement is that you will purchase on impulse to food you wouldn’t normally put in the cart.  I liken this grocery store theory to the CD craze going on right now and of the mid 90s.  It is tempting to feel the comfort of safety and secure growth when we have been in such volatile times.  When I use the word “volatile,” I don’t just mean the stock market.  Over the last 3 years, we were reminded that life can change for us from matters outside of our control.  From fears of a pandemic to concerns of prices in the store, we have found ourselves on not so familiar ground concerned about how we will pay our bills and progress on our day to day goals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

    So, back to the question, should I buy a CD?  When it comes to any investment option, I recommend having the conversation.  Sit down with you financial advisor; discuss risk and reward, opportunities and your goals.  Make sure you are considering all the options before locking in that investment. 

    Don’t hesitate to reach out to a our office on these questions.                                                                                                                                                                                                                                                                                                                                                                                                                        Blessings! 

                   -Dan