Money Management

Certificates of deposit really aren’t a great investment, even though they have high rates right now. Check out five reasons not to buy them. [[{“value”:”

Certificates of deposit (CDs) may seem like a pretty great investment right now. CDs are safe because they are FDIC-insured. There are tons of them out there with no minimum investment requirement. Plus, you can earn rates above 5.00%.

But just because an investment might seem like a good idea doesn’t mean it’s right for everyone. In fact, there actually may be more reasons not to buy CDs than to spend your cash on one. Just check out these five reasons you should steer clear of CDs.

1. There are better investments out there

It’s true that many CDs are offering rates above 5.00% right now, according to The Ascent’s guide to the best CD rates. But do you know what’s better than earning 5.00%? Earning 10.00%.

You can reliably expect to earn a 10.00% average annual return if you open a brokerage account and put your money into an S&P 500 index fund. Now, this does mean taking on a little more risk since you can always lose money when you invest. However, the risk is really low in the right circumstances.

The S&P 500 is a financial index made up of 500 of the largest U.S. businesses from all different industries, so you’re basically betting on the U.S. economy. And the track record of S&P funds is very consistent over the long term. If you have time to wait out downturns should you be unlucky enough to invest at a bad time, the chances of losing money are slim.

As long as you won’t need your money in the next couple years, choosing the higher returns an S&P fund offers is likely to be a way better financial choice than a CD.

2. You don’t get any tax benefits

If you’re not comfortable taking on the risk of an S&P fund or your investing timeline isn’t right, there’s still another reason to steer clear of CDs: You won’t get tax benefits when you buy them, but you will if you choose T-bills instead.

T-bills, or Treasury bills, are backed by the U.S. government so you don’t have to worry about losing money when you buy them. The rates they’re offering are really similar to CDs right now, and those rates are fixed for the length of the term just like CDs. However, you won’t pay state taxes on the interest you earn from T-bills. You are taxed on that income from CDs.

Why give the government a cut of your money if you don’t have to? Treasury bills can be slightly more complicated to buy since you have to purchase them at auction, but it’s not difficult to do that online. Just go to TreasuryDirect.gov to get started.

3. You have to lock up your money

CDs require you to keep your money invested for the entire duration of the CD term to avoid a penalty. In other words, you’re giving up your liquidity for a mere 5.00%. If you need the money for something, like a surprise expense, you’re stuck with a fee to break your CD early.

Giving up access to your money and risking a penalty is a big deal. Before you even consider doing it, make sure you won’t regret your choice. If there’s a chance you’re going to need the funds before the CD matures, that makes investing in certificates of deposit absolutely the wrong choice.

4. Returns aren’t that impressive after inflation

Now, you may be looking at those 5.00% CD rates and thinking you’re willing to give up access to cash to earn such a great return. Remember, though, that inflation is eating away at the value of your dollars right now. And it’s going to keep doing so once you’ve bought your CD.

The U.S. inflation rate as of April of 2024 was 3.40%. You need to earn that much just to not lose ground. So your 5.00% CD isn’t increasing your buying power by that much. After taking inflation into account, you’re earning only 1.60%. Not so impressive when you look at it that way — and likely not worth giving up your liquidity for.

5. Savings accounts are offering competitive yields right now

Finally, there’s the basic fact that savings accounts are offering comparable rates to CDs right now. Of course, it’s true that savings account rates are variable and subject to change. However, since inflation is higher than the Federal Reserve’s target rate of 2.00%, the Fed may not cut interest rates for a while. So there’s no reason to expect a drastic reduction in savings account yields any time soon.

Since you can get the same returns while keeping your money available to you, CDs aren’t the right fit for every situation. Don’t let the high rates lead you to make a mistake and jump into an investment that just doesn’t make sense for many people. Stick with savings, opt for T-bills, or put your money into a brokerage account instead.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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Are you contributing enough of your earnings toward retirement? Read on to find out. [[{“value”:”

You don’t necessarily need the same income you had during your working years to live comfortably in retirement. By retirement, your home might be paid off, and you won’t have to spend money to commute to a job if you’re no longer working.

But generally speaking, you probably want to replace the majority of your former income so you’re able to not only cover your essential bills, like housing and healthcare, but enjoy retirement to the fullest.

To get there, though, you can’t just rely on Social Security. You need a good chunk of your retirement income to come from savings you accumulate yourself. But how much of your paycheck should you be setting aside for the future? Here’s what Vanguard has to say.

Save now for a financially stable future

Vanguard research finds that saving 12% to 15% of earnings could help workers today retire comfortably. But is that good advice? Well, let’s take a look.

Imagine you’re in your mid-40s and earning $60,000 a year. Social Security estimates that your monthly retirement benefit will be $2,182 at full retirement age (which is 67), or about $26,000 a year.

So let’s say you save 12% of your paycheck each year, or $7,200 annually ($600 a month). If you do that over 30 years and manage to score an 8% average annual return in your retirement account, which is a bit below the stock market’s average (10%), you stand to accumulate about $800,000.

If you then withdraw 4% of that balance each year in retirement, which is consistent with what financial experts have long recommended, you’re left with $32,000. Add $26,000 in Social Security, and you’re got $58,000.

That puts you in an absolutely wonderful position. You’re basically replacing almost your entire $60,000 salary. And that level of savings gives you a cushion in case Social Security ends up having to cut benefits, which you may have heard is a possibility.

What if you can’t save 12% to 15% of your salary?

Saving 12% to 15% of your salary each year for retirement may be good advice — but it’s also very difficult to do. This especially holds true in today’s economy, where everything seems to be overwhelmingly expensive, from food to utility bills to entertainment.

So if you can’t part with that large a chunk of your salary today, don’t stress about it. Instead, save what you can now and aim to increase your contributions toward retirement once your income picks up. If your salary increases by $2,000 in 2025 and your bills only rise by $500, put the remaining $1,500 straight into your employer’s 401(k) before you get used to spending it.

Remember, too, that if you save and invest for retirement over a long period of time, smaller contributions to your nest egg can go a long way. So while following the above advice could set you up for a great retirement, don’t assume there’s no middle ground. You’re better off saving 2% of your salary if that’s what you can afford than saving nothing at all year after year.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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