Why CDs?

[LXEX55]

With the interest rate as low as it is, what is the benefit in putting your money into CDs? What am I missing here? Isn't the interest also taxed? Other than safety, I mean.

 

[DrRoy]

Yes it is taxed. Sometimes the rates are a little higher than money market, but your $ is tied up for a while.

 

[audreyh1]

Currently some CDs are offering higher rates than some bond funds of similar duration. With FDIC insured CDs you have no credit risk like you do with non-treasury bonds.

Some folks are investing in CDs for their cash holdings. Some CDs are currently offering better rates than money market funds and high yield savings accounts.

With options like 11 month no penalty CDs from Ally Bank, you money is not even tied up.

 

[Al18]

Reasons to invest/own CD's:
1. Stocks are overpriced
2. To hold money for future stock buy's
3. Retirement income when you don't want to sell stock
4. Keep yourself in a lower tax bracket for tax purposes or ACA
5. Reliable income

 

[Luck_Club]

Safety...

 

[Senator]

Reasons to invest/own CD's:
1. Stocks are overpriced

How do you know this?

Every time I make my monthly buy of my standard ETF, like HDV, it seems over-priced. And when I buy for the next month I wish I could have bought it for last month's price.

 

[Montecfo]

With the interest rate as low as it is, what is the benefit in putting your money into CDs? What am I missing here? Isn't the interest also taxed? Other than safety, I mean.

I do not see a strong value proposition in CD's but i keep looking. I think you can do better in ST bond funds without tying up your money. I understand the safety angle, but to me it is not compelling.

 

[Dawg52]

How do you know this?

Every time I make my monthly buy of my standard ETF, like HDV, it seems over-priced. And when I buy for the next month I wish I could have bought it for last month's price.

Probably because of the same reason HDV seems over-priced to you when you buy. To the average layman like myself with the DOW at an all time high, it just appears obvious. But it may go to 50k in a year or two for all I know.....which ain't much.

 

[RunningBum]

With the interest rate as low as it is, what is the benefit in putting your money into CDs? What am I missing here? Isn't the interest also taxed? Other than safety, I mean.

What are you suggesting instead?

 

[Aerides]

For me, CD's replace cash. It makes more money than 0, and more than a high-yield savings account. 2% is better than 1%, etc.

 

[pb4uski]

No interest rate risk for bank CDs nor credit risk if you stay within FDIC limits. Similar yield to bonds for similar terms.

 

[haha]

With the interest rate as low as it is, what is the benefit in putting your money into CDs? What am I missing here? Isn't the interest also taxed? Other than safety, I mean.

It is not clear if you are asking "why CDs rather than savings accounts", or "why CDs rather than just holding more stock?". Which is your question?

 

[Car-Guy]

This has been asked many times in so many different ways. Maybe I should just cut and paste a previous response. Naw, it's cold outside, so here goes.

OK, because "for me" it fits in with my "bucket strategy". Bucket one is my foundation money. Or money that I should be able to live on for the rest of my life if everything else is lost. All of that money is in tax deferred accounts spread across as many financial institutions as I need to stay under the FDIC limits per account. All of that interest is tax deferred too until RMD's kick in and then I'll need to do "something". It's still a few years away, but I'm actually starting to think about what that "something" might be.

Bucket two is my living money and has been since I retired. Pays for utilities, taxes, insurance, food, hobbies, etc, etc. The money in this bucket is in interest bearing checking accounts, market speculation and market investing equities for the most part.

 

[savory]

For me, it is like keeping some can food and water in an emergency cabinet. Not that I actually do that but it gives me piece of mind to have some money safely tucked away for a market catastrophe. A low return insurance policy that fits within my entire investment modal.

 

[John Galt III]

I have extreme stock-drop phobia. That's why I have most of my portfolio in stable value funds (even better interest rates than cd's, in my case) and cd's.

 

[OldShooter]

I've been buying treasury bills on the auction lately. I give up a few bps vs CDs but I don't have to fool with FDIC limits and if I want to sell, for example to take advantage of a big market drop, t-bills are about as close to cash as one can get. CDs are more expensive to get out of early.

Re the market being "overpriced" here is a pretty worthwhile video featuring Gene Fama and Richard Thaler. Even Thaler agrees that small investors should have the expectation that the market is efficient, just as he is arguing that sometimes it is not. Are markets efficient? | Chicago Booth Review

 

[street]

Reasons to invest/own CD's:
1. Stocks are overpriced
2. To hold money for future stock buy's
3. Retirement income when you don't want to sell stock
4. Keep yourself in a lower tax bracket for tax purposes or ACA
5. Reliable income

Exactly >>> safety is a good one. For me I could ride out a long down turn in markets and would never have to sell an investment. To me that is money in the bank. I don't want to sell what makes me money but I do want to weather the storm.

 

[Sue J]

With the interest rate as low as it is, what is the benefit in putting your money into CDs? What am I missing here? Isn't the interest also taxed? Other than safety, I mean.

My CDs are in a Roth IRA (PenFed 10yr @ 5% from Dec 2010 and 5yr @ 3% from 2013) so no tax.

To me the idea of no risk is what makes them a good choice.

 

[Henry Lili]

With some work and patience you can get better then average rates. My CD ladder has a weighted duration of 1.6 years and yields 2.2%. Anchored by those good old PenFed and NWFCU 3% CDs that unfortunately come due end of 2018.

 

[Curmudgeon]

CD's for me are interest-earning cash: they never lose value, I can get the money in a day or two, and I'm earning about 1.8% (not much worse than some of my bond funds) on the latest entries in my ladder.

 

[wolf]

Currently some CDs are offering higher rates than some bond funds of similar duration. With FDIC insured CDs you have no credit risk like you do with non-treasury bonds.

Some folks are investing in CDs for their cash holdings. Some CDs are currently offering better rates than money market funds and high yield savings accounts.

With options like 11 month no penalty CDs from Ally Bank, you money is not even tied up.

Ally now offering No Penality, 11 month Cd, 1.75%

 

[Ready]

I find myself asking the same question as the OP given how low rates are. But I don't want all of my fixed income in bonds since bonds have interest rate risk. But so far it has not been a good strategy as my municipal bonds have outperformed my CDs and I don't pay any taxes on them.

Who knows if that will continue in the future.

 

[imokurok]

CDs make up a small percentage of our portfolio, but provide a safe way to stash some emergency reserve and earn some interest. I actually may add more as I’m in this OMY phase. Eventually stock market will go down, and interest rates will go up. Or maybe not. But whatever happens, having an array of different ways of earning passive income makes sense. I believe in diversity, and have no problem with FDIC insured boring stuff being a part of our holdings. You never know when weather conditions may suddenly change.