Everybody knows bank CD’s are safe, right? Not so fast… In today’s financial environment, CD’s face some unexpected risks that you should consider before automatically renewing your CD when it matures.
An internet search of current rates from two of our largest banks (Birmingham, AL) for a 1-year CD revealed rates of 0.10% (APR). Investing in a CD exposes you to both current income taxes and, less obvious, inflation. Let’s do some quick math to expose the risk you face:
Interest Rate times Taxes minus Inflation equals Real Return
0.10% 22.0% 1.71% -1.63%
Based on current rates for CD’s, you are seriously losing money over time. Even if you shop around for higher rates and find a bank willing to pay 2.0%, you’d still be losing 0.15% on your money after taxes and inflation.
What’s a person to do?
- First, be aware of the true costs of investing your money.
- If you expect to need the money within five years, CD’s and money market accounts may be your best bet. Be sure to shop for higher rates at sites such as BankRate.com.
- For the money not needed for ten or more years, consider stocks for long-term growth.
- When investing in stocks, consider more conservative strategies such as blue-chip, dividend-paying stocks such as AT&T, Home Depot, Exxon.
FOX 6 Talking Points
“CD’s Can Be Risky Too!”
- A 1-Year CD can yield -1.6% after taxes & inflation
- CD’s best if you need your money within five years
- Shop rates! com
- If you don’t need money for ten years, consider buying stocks!
- For stocks: Consider blue-chip, dividend payers
Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books including J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.