Kovar Capital: Are CDs Cool Again?


Hey Taylor - A friend of mine was talking about putting money in CDs recently, and I realized I had kind of written off that investment strategy. Should I reconsider?

Hey Marshall - I think you should take a little time to consider all the options, especially as economic conditions change. That said, you’ve got a lot of other places where you can put your money. Here are a couple of things to think about before you do (or don’t) choose to put your money into a CD.

1.) Interest rates. There’s one main reason to think about stashing cash in a CD, and that’s good interest rates. Since rates have already nudged up twice this year, you can definitely consider interest-yielding investments like CDs that might have fallen off your radar the last few years. I’m seeing a lot of CDs upwards of 4% APY and a few as high as 6%, which is a fine rate on a sizable deposit. At the same time, a few banks offer 3.5 or 4% APY on a standard savings account, and that’s without the limited liquidity that comes with a CD. While interest rates are up and that’s good for CDs, you still need to compare this strategy to the alternatives.

2.) Inflation. Unfortunately, the whole reason we’ve got higher interest rates is to combat this nagging inflation, and as long as the inflation rate is within striking distance of the APY on your investment, you’re not getting the return you really want. Buying into a four- or five-year CD right now could be a bit of a gamble, the bet being which direction inflation will go and how long you’ll have to earn interest that’s outpacing the inflation rate. If inflation doesn’t drop as fast as we all hope it does, the interest payments lose some value.

3.) Alternatives. Before shooting down an investment option, you should always have another plan. Something is better than nothing. I’m not pushing CDs on my clients right now, but I’d rather someone earn 4% interest on their money than earn less than 1% in a subpar savings account. Likewise, before you seriously consider a CD, you have to think about other options. If you haven’t maxed out your IRA, that’s where you probably need to start. After that, I’d opt for shares of a good company that pays dividends before trapping your money for upwards of three years in a CD. Interest rates being what they are might have you shying away from a real estate investment, but bargain-priced REITs might be a great addition to your portfolio right now.

A CD will never make or break you, for better or worse. It’s not a terrible place to stash extra cash, but if all you did was invest in 4% CDs, you’d never retire. Consider your other investments and your overall liquidity, then make sure your money is out there doing some work. Thanks for the question, Marshall!