The Truth About CDs

Certificates of Deposit (CDs) are among the safest and most reliable investment products available. But after the scandal that erupted this week, many are taking a second look.

R. Allen Stanford was accused by the SEC of masterminding an $8 billion CD scheme, delivering investors double-digit gains when the average CD rate of return remained steady in the single digits. A lesson perhaps learned best with the Bernie Madoff scandal, investors should always be wary of returns that wildly beat the market, especially when the rate is as predictable as that of the average CD.

It is, after all, the promise of safety that makes CDs so popular. They’re primarily short-term savings vehicles, says retirement planner Bill Losey. In his business, they’re often referred to as ‘certificates of death’ – great for money you need in the next five years or so but not adequate for retirement or anything further down the road. CDs simply do not keep up with the pace of inflation, Losey says. And when you add taxes, you need to be making an annual return of six or seven percent just to break even over the long term.

If you are starting an emergency fund, the consensus from Thursday’s Money Desk is to pass over CDs. Keep your emergency money liquid and easy to access. The best vehicles are money markets or savings accounts, Losey says. That way, you can access the cash in an emergency without paying penalties (you will pay a penalty if you need to abruptly liquefy a CD). Carmen has experience with high-yield online savings accounts that offer competitive rates. Just make sure, as always, that your bank is insured by the FDIC.