Are you wondering why invest in certificates of deposit when rates are so low? Funny you should wonder because CD rates rose significantly since the 2020 lows. In 2023, both CD rates and Treasury bond yields reached their highest levels since 2007. By Q3 2024, the Fed finally started to cut rates after multiple rounds of raises. And although rates are starting to decline, they are still notably higher than the depths of the pandemic.
We've also experienced a lot of changes with peaks in inflation, which have since come down. And lulls in risk assets like stocks and real estate which slowed down but seem to coming back. Thus, more people are looking to the safety of Certificates of Deposits, Treasury bonds, and municipal bonds to protect their wealth.
Roughly 5% of my diversified net worth is in certificates of deposit and other stable instruments. They're yielding a blended rate of around 4.5% as of 2024. That's a pretty good rate that helps keep above a normal 2% level of inflation. Further, 4.5% is better than losing money during a stock market correction.
With many CD rates and Treasury bond yields back over 4%, it's a good time to buy CDs and Treasury bonds. It feels good to optimize cash yields when rich central bankers look to destroy global economies to tame inflation.
Here's a tip. There are times when the 10-year yield might be yielding less than a similar duration certificates of deposit. Look to invest in CDs to take advantage of such a spread. For example, the 10-year bond yield might yield 3.5%, while you can find 5-year CDs yielding 3.75%. This is a good type of opportunity to take.
Why Invest In Certificates of Deposit
Here are a list of reasons why I invest in Certificates of Deposit, even when rates are so low.
- As long as I'm making money, I will have a steady inflow of excess cash. Given I save over 50% of my after-tax income a month, I've always got to reinvest my cash flow. If rates go up, I'm just going to invest in a higher yielding CD for the longest duration possible. It's not like I'm one and done. The CD ladder is forever growing so long as I have income.
- Accrued interest is accessible. In the event that I no longer have income and no longer have any savings, all the accrued interest earned from my CDs can be withdrawn and used penalty free.
- CDs are 100% backed by the FDIC up to $250,000 per person on the account. I don't have to worry about some corporate CEO scandal or competitive threats blowing up my specific stock. As a result, I can focus on more productive things.
- CDs offer a much higher interest yield than money markets. For example, when CD interest rates were below 2% people were complaining but they were actually 5-10X higher than money market interest rates at 0.1%-0.3%. Money markets are the real travesty! One time I left the majority of my money in a money market for two months earning 0.3% a year which didn't feel optimal. CDs are better.
- Diversification is important. Throwing 30% of my recurring savings in CDs is prudent, leaving me with 70% to invest in the stock market, the real estate market, or in myself. It was fun buying Facebook for a 30% gain. But I'm under no delusion I will continue to get lucky. I also keep my single stock investments to around $25,000 due to my risk metrics. I'm unwilling to invest in Treasuries because of how high they've risen already and their lower rates than CDs.
More Reasons To Invest In Certificates Of Deposit
Here are even more benefits of investing in CDs even when rates are low.
- Passive guaranteed income is becoming more valuable. For example, below you'll see I had Iabout $2,800 a month in CD interest income. If I threw the entire $250,000 in an online savings account, my savings income would rise to to ~$3,000 a month. With $3,000 a month in guaranteed income for the next several years, I know I will not be begging on the streets if I fail at entrepreneurship.
Having the CD interest income safety net helps give me the confidence to create my own luck. Generating steady passive income is the key to financial freedom! Currently, I generate over $300,000 in passive income to take care of my family in expensive San Francisco.
- I'm not greedy. Everybody says that inflation will eat away at my earnings. True, but my absolute capital is still going up with CDs. I'd rather make 4% on a CD than lose 5% in the stock market. Interest rates and inflation are tied together. You don't have high inflation without high interest rates and vice versa. Once you build your nut to live off, you will do everything you can to preserve it because it took so long to build.
- Focusing on my X Factor. Given I've got the energy right now, I'm all about focusing on my X Factor. The X Factor is in all of us. We just have to unleash the beast. Often times, we can't because we're worried about school, money, family, etc.
By putting my money in certificates of deposit, I just don't worry about the funds at all anymore. I can then focus more of my time on my online work.
In fact, I published an instant Wall Street Journal bestseller, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. It is your secret weapon to getting rich and tackling some of life's biggest dilemmas. Given it is a bestseller, it will generate passive royalty income for years to come.
Rates Will Likely Stay Low For A While
It's important to get over the fact the absolute rates are still low. Look at things relative to other things when investing in certificates of deposit.
When I was investing in 4.5% CDs in the past, people were laughing at me for being so conservative. Well they sure as hell weren't laughing after they lost 35-50% of the value in the stock market in 2009! And they sure as hell weren't laughing when they lost their jobs due to the implosion in corporate earnings.
We are in an environment of incredible volatility and risk. Stock valuations are expensive. Rates are going up. Expectations are sky high the economy will continue to recover. Investing some money in certificates of deposit isn't a bad idea to preserve capital.
Furthermore, I'd much rather make a guaranteed 4.5% on a portion of my portfolio than LOSE money in the stock market. We saw temporary losses in the stock market in March 2020. And the NASDAQ and S&P 500 corrected in 2022.
By investing in a CD, a AAA-rated municipal bond, or other safe assets, you can better preserve your capital.
Save Often And Aggressively
If you are a prodigious saver then certificates of deposit are a way to diversify your savings. My favorite bank for CDs is CIT Bank. Check out their no-penalty 11-month CDs where you can open an account with only a $1,000 minimum balance. The greatest benefits of this type of CD account is you can withdraw all of the money before maturity if needed without any penalties or fees.
They also offer a lot of short-term CDs with highly competitive rates as well as high-yield savings accounts such as the Platinum Savings Account.
Putting 5% of my net worth in certificates of deposit has enabled me to sleep better. $100,000 invested 7 years ago at a 4% compounded rate of return is now worth 32% more. I will continue to invest 5 cents for every single dollar I earn in CDs. I sleep well every night knowing my money will always be there and is getting the best relative return.
When it comes to investing in CDs, make sure you open an account with a trustworthy bank that offers the highest rates. I’ve found CIT Bank has the most competitive and highest CD rates nationwide. They are my go-to bank for buying CDs.
Alternative To Investing In Certificates Of Deposit
Although I share why I invest in certificates of deposit, my main investment is in real estate crowdfunding for higher income. Real estate accounts for roughly $150,000 out of my estimated $300,000 a year in annual passive investment income.
Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then.
Given interest rates have come way down, the value of rental income has gone way up. It now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity to buy real estate today.
Here are my two favorite real estate investing platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds and eREITs. Fundrise has been around since 2012 and has over $3.5+ billion in assets under management and over 500,000 investors. For most investors, I think it's wise to invest in a diversified real estate fund for passive income.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Cities like Charlston potentially have higher growth due to job growth and demographic trends.
I've personally invested $954,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. Certificates of Deposit are good for protection. With real estate crowdfunding, I'm looking to make a higher return.
Manage Your Finances In One Place
Get a handle on your finances by signing up with Empower. They are a free online platform which aggregates all your financial accounts in one place. This way, you can optimize your finances. Certificates of Deposit are only one of many financial instruments to monitor.
Before Empower, I had to log into eight different systems to track 32 different accounts to manage my finances. Now, I can just log into Empower to see how my stock accounts are doing. I can also check when my CDs are expiring. My favorite thing to track is my net worth.
One of their best feature is the 401K Fee Analyzer. It is saving me $1,700+ a year in portfolio fees I had no idea I was paying. They also haven an incredible Retirement Planning Calculator. It pulls in real data to output as realistic a financial scenario as possible for your future.
I definitely recommend you run through your numbers, input different expense and income variables and see how you stack up. There is no better free tool online that I've found today. It only takes a minute to sign up.
Access The Best CD Rates
CIT Bank also offers the highest rate money market accounts and savings builder accounts I’ve seen.
It’s easy to set up a secure account online without ever needing to step into a branch. You can access your account info 24/7. And their customer service team is available to help with questions six days a week.
About the Author
Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 due to his investments. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom. You can sign up for his free weekly newsletter here. Why Invest In Certificates Of Deposits is a FS original post.
Where in the hell are you finding CD rates around 2%?
But I’m focused on investing in commercial real estate through real estate crowdfunding. CRE is the biggest laggard asset class now as w com out of the pandemic IMO.
I’ve got long-term CDs at higher rates. My blended CD rate is 2%.
CD’s are now at 1%. Other than stuffing my mattress with cash, what is left for me to do to keep these funds safe. I’m in my mid 70’s.
“Interest rates and inflation are tied together. You don’t have high inflation without high interest rates and vice versa.“
Can we explore this statement further? I was under the impression that when the fed raises interest rates, it reduces the money supply due to less borrowing and curbs inflation by making money more scarce.
wow, who do you have your accounts through?
Even if you don’t invest your money in stocks and go with an index fund (such as the S&P 500), you will make a 12% return per year on average (correcting for inflation, approximately 7-8%).
This is factoring in the so called “market volatility” you speak of. Yes, some years the market may undergo correction losing X%, but then it will rebound. After 2008 where the S&P 500 fell 37%, it had returns 26.5%, 15%, 2%, 16%, 32%, 14% the next 6 years.
Read Peter Lynch’s book “Beating the Street.” Lynch was the fund manager of Fidelity’s Magellan Fund posting a 29% return over a 13 year period!
Year over year, investing solely in stocks is the best way to go to maximize profits.
I own real estate and also have new money to invest pondering of either buying something new or going CD.
Real Estate paid cash:
For a ‘cheap’ $500K apartment in NYC, I would get around $1100 monthly rent (already minus real estate taxes/HOA/insurance). Not even put in account the broker fee when I sell it, the repairs, the time the apartment is empty, the STRESS! Not sure if real estate will go up much more here in town, right now it is going down again.
CD – 5 years at current 3%:
With $500K in a CD I would get $1,348 monthly… obviously after 5 years the rate could go down and I can not do the same thing again, but it also might go up.
Same for a $235K loft in Atlanta, rent would get me $900 (everything taken out). Now a 10-year IRA CD for 250K would get me $785 monthly… for having no stress???? I take the $100 less…
Not sure if I am misunderstanding the concept, but CD’s look great versus real estate…
Looking for insights here…
Cheerio
Barb
Hi Sam, I am in my early 20’s and may be selling a company looking at a take home of between 6-10 million. I want to do this right.
I read that the insurance only covers 250k per person.?
Are there better perks for entering over a million into an acct.
With numbers that high how many accts should I deposit to?
Should I entertain the idea of a few 2 yr, a few 5yr and a few 10 yr so there is always money coming in?
Also I am using a “junk” email address for this that I do have access to simply because my real one has my company name it in it and I would like to keep that under wraps for the time being.Thanks!!!
Hi Sam,
I currently am 40 and invest very similar to you. I am in wealthfront, lending club, and I also ladder my Cd’s, I also have some preferred, Reit’s, and high risk high reward stocks.
you put Venture Debt Fund. Please be more specific. I am looking for new avenues to invest in. Thanks.
Sam,
are you planning to roll over the amount when the cds expire
I’ve still got 1-2 years until my beloved CDs come due, but so far, my plan is to:
1) Allocate 30% with Wealthfront
2) Rollover 30% into a 5-7 year CD at 2.5% or higher.
3) Invest 30% of it into a Venture Debt Fund.
4) Invest 10% into P2P lending via Prosper.
In a rising interest rate environment, everybody needs to be a LENDER, not a borrow.
Goldman Sacs is offering 5-year CDs @ 2.3% and 10 year CDs @ 2.9% that are brokered through Fidelity in a Roth IRA. How do I determine the rating of these investments? How has Goldman Sacs recovered from their financial meltdown? Would the shorter or longer rate CDs make more sense held within a Roth IRA? Thanks for your feedback and your amazing website!
CDs are FDIC insured up to $250K per individual and $500K per couple, so as far as I can tell, they would be considered AAA rated. I would follow a net worth allocation framework by age or work experience (click link for the post) to see how you’d allocate your money.
The stock market is pretty dicey in 2016, and I’m building a 50/50 stock/bond portfolio allocation myself. Roughly 10% of my net worth is in CDs.
Welcome to my site!
Sam
You realize people who invest in the stock market probably store some of their monies in CDs as well? Chances are if they were smart investors, they left that money where it was and made it back and also broke into their other financial plans and bought gold and more stock and made even more money which is the reason the rich keep getting richer.
There are a number of things wrong with this, however I will deal with just one. FDIC. Anyone who puts their faith and trust in FDIC insurance deserves what they get. By FDIC’s own admission they only have slightly more then 1% (about 1.35%) of their insurance obligations in reserves. In other words for every account of or under $250,000 in a bank, they have a maximum of $5,000 in actual cash to cover a losses in the event of bank failures. The last banking crisis sent the FDIC reserves into negatives, and it was only not worse because many of the larger banks were bailed out by the Federal Reserve and the taxpayers. Any normal private insurer is at minimum a 100% reserve institution, the banks and the FDIC are fractional reserve institutions, and that is reason enough alone to not have your money in a CD. Now they are experimenting not just with bailouts but with bail-ins. Fun stuff. Good luck your gonna need it.
Now there is someone who knows their stuff nobody has mentioned that in this blog except for you Bravo! fiat paper money is nothing but debt just do what the rich do they convert their fiat paper money into real tangible assets like precious metals or income producing real estate. I don’t see the Fed raising interest rates much more in the next few years they carried a nearly 0% interest rate for almost a decade with the debt that this country has (ie) 19 trillion plus the debt of the unfunded liabilities that our promised to Baby Boomer retirees this whole thing is tough to call.
This is why everybody needs to turn FUNNY MONEY into REAL ASSETS like real estate.
Hey Sam,
How do you even start a CD investment?
Can you guide me through in steps? It would really help me out!
Thanks,
Neyo
Correct me if I’m wrong, I’m just a college student, but don’t you have to take into account inflation? If you invest in a 1.6% CD and inflation is 2%, aren’t you actually losing 0.4% every year? Why would you ever want to do that? Aren’t there better inflation-resistant investments you can make?
i am doing the same i am banking with barclays banking i invested 25 million into a 5 year term of 2.25% comp daliy more then one account i was setting up accounts with ally banking and they told me they will never open a account up for the life span of my life i was blown away crazy people omg so i asked why they told me i was located in mo but there system was telling them i was in cali state odd ally banking system i do not recommend ally i would liked to bank with them but they acted odd with me please help me out on that one thanks ow and i am the cheapest person alive
hello, im a total novice about cd investing and could use a little help. I am gettting a 100,000 settelment from a lawsuit and would like to know how to invest it to get a montly income. any ideas?
I’m a big fan of Ally Bank CD’s. I have 12 one-year CD’s, one for every month of the year, each maturing on the first of the month. I just started this plan a year ago, so the amounts in the individual CD’s are pretty small, but the goal is for them to be rolled over every year, adding $100 each time, and for them to eventually be $1200, which is the amount of my mortgage payment. So I could make the full mortgage payment on time every month for a year. I have an alert on my phone on the first day of every month, reminding me to call. You get a .25% rate increase over the current rate when you renew a CD as a “loyalty reward,” so I’m getting more than the market rate for a 12-month term every time I renew. I realize this is an unconventional way to structure an emergency fund, and some people might think it’s too much hassle, but I like the peace of mind in knowing that in the event of a job loss or disability, the roof over my family’s head is safe for a year. Disability payments or unemployment, as well as our regular savings, could go to other bills. If no catastrophe ever strikes, I can simply cash in a CD once a month towards the tail end of my mortgage and pre-pay it.
Great to hear Allyson! And good job continuing to add to your CD savings!
Sam, I just updated my CD rate sheets today and noticed several CDs paying greater than 2%. There are three GE Capital Bank CDs (6, 7, 10 year) paying 2, 2.15 and 2.65% respectively. The YTW is slightly higher.
Nice! What is the reputation of GE Capital?
All I’ve seen are credit unions which I’m not comfortable with yet.
I agree with you on the topic of credit unions
GE Capital has a Kroll rating of C+, which is considered investment grade – adequate financial condition.
A C+ rating for GE Capital is investment grade? Hmmmmmmmmmm……….
Why were you not comfortable with credit unions?
I get some of my best CD rates at credit unions.
One of the biggest cons over the past decade is financial advisers getting retail people way into stocks and various funds for the fees.
Like you said Sam, a CD invested 7 years ago at 4% has provided over a 30% return. Compare that to stocks, property, and that is a great figure! If I only invested everything in gold…
I started off with $5,000, then slowly built the amounts over the next 13 years. It really depends on how attractive the relative rate is compared to the risk free rate and the economic scenario. The point is to just start, and put money in consistently EVERY year.
After the initial grace period of say 5-7 years, you will have new month come due every single year. It’s the thesis to The DVD Method To CD investing.
FSOS is going well! I’ve had to put clients on hold b/c I want to finish my book!
You make a compelling argument for CDs. While I think you make a strong case for your CD investments, I wouldn’t recommend it to everybody.
Most people that I come across “invest” 100% of their savings in CDs which I find baffling. Considering CDs have produced a negative real return 8 of the last 15 years, it’s contradictory to say that it’s a way to “not lose money.” (Of course – I’m assuming this statistic used whatever a 1 year CD was averaging). Once you’re in your later years, I understand the need for preservation but I get frustrated when I see a 25 year old investing in CDs.
You actually touched on one thing I was going to bring up. CDs (to me) are fine if they aren’t your only investments. You have real estate, you have online income, you have a diverse source of cash flow that most people don’t have. The time/money spent here is absolutely an investment that has some risk but also amazing potential returns.
With these mega returns you’re getting elsewhere, it’s fine to have 30% of your dough in CDs.
Abe, people get caught up in “negative real return”. Would you rather be up 32% in the past 7 years on a 7 year CD yielding 4%, or up 5-10% with the market?
Most people I come across invest 100% of their savings in the stock market, which I find baffling. I know only a small minority of people who invest the majority of savings into CDs.
I suppose my views are biased since the “majority of people” I speak of were actually sitting in a bank branch when I was speaking to them.
I disagree, I think most DON’T understand a real negative real return. Especially people who invest in CDs who are typically not that financially savvy. Most don’t take inflation into consideration and is the reason why it’s called the “hidden tax”. If you understand this and still invest in CDs then that’s fine by me.
Maybe. What is your asset allocation? Are you saying you’ve invested most of your savings and net worth in the stock market over the past 10 years? If so, how has that done for you?
I think it is way too risky for people to invest more than 50% of their net worth in the markets, no matter what age. Obviously, the older the more risky. Think about people who wanted to retire between 2005-2015.
Less than 50% in the stock market? If you are near retirement yes. You are stuck on the recency effect. Stock market (besides owning your own business) is the best way to get wealthy. Rentals counts as a biz. It all depends if you are biz owner or a employee. If you have the employee mentality then you should be more than 50%.
Are you counting primary residence? I don’t think it should be counted.
If not just including our retirement accounts we are at 60% AA for stocks. I’m not sure what that would be with all of our investments. Maybe at 50% number maybe slightly less if you include all investments. Our retirement accounts
are about 1/3 of our total NW.
If the money is for retirement 20-30 years away you most definitely should be higher than
50%. The statistics show you should be above this.
The greatest wealth generator is ourselves.
If 1/3 of your net worth is in the stock market, then you are right in line with me. Are you saying one thing and doing another?
It should read “If just including our retirement accounts”
I’m thinking just specifically my retirement accounts when I first read your post, but I guess you are right.
Since we are only starting to build up our financial portfolio, we cannot afford to put 30% of our net worth in CD, much more in 10-year term. We just started investing in CD a couple of months back on a 2-year term. We hope to make another one before the year ends and in a longer term. You just inspired me to create a CD investment in 10-year term. Thank you for sharing!
I had $60k in CD’s at one point, rockin’ something like 5% at age 18! Unfortunately, I had a contingency on the account and was able to withdraw all of the money pensalty-free. I spent every last penny. :(
But, at least you had fun! Whooo hoo! That’s what I always say to folks who used to have money. At least they enjoyed the rewards money bought. Don’t you think?
I did have some fun, that’s for sure! And snagged me a smokin’ hot wife (Ricky Bobby reference) ;)
Glad that you’re interested in protecting prinicipal with a portion of your income – I’m investing a bit now, but I’d like to move into more stable investments as I get older. I could probably live off of your CD interest!
Always interested in protect principal Jeff, especially the bigger the principal grows!
The question is, could you and your wife and child live off my CD interest? Unlikely, happily, hence why I gotta keep growing the nut!
Wow, nice Sam! Having roughly that much cash in CDs, throwing off $2,800/month, can assuredly let one sleep a lot more comfortably!