These days it’s hard to see bank CDs as anything but a waste of time and money for your family’s finances.
I started writing online for money a while ago. It’s a great way to earn a little cash and it offers a flexible work schedule for a busy dad with a day job. However, whenever you start to earn more money, the government also expects a raise. After a while, it became necessary to start thinking about withholding some revenue to pay for additional income taxes.
I was mulling over options while making a deposit at my bank. I wanted a safe interest bearing account for a short period of time. My bank happened to be offering a decent rate, for today’s standard, so on impulse, I put a few hundred aside in a certificate of deposit (CD).
It was a mistake for a number of reasons and I should have known better. Here’s how I wasted my time and money.
At my bank, CDs automatically roll into a new CD for the same time period if you don’t direct the bank to put the funds elsewhere. So, even though I took out a five month CD, I missed the boat twice during the expiration period. When I finally remembered to direct the savings into an account 15 months had passed.
You Can Find Better Rates
Earning interest from a bank has truly become a thing of the past. These days you are lucky if you can earn 1% on your principal. In fact, the average 1-year CD rates were down to .33%. There are many savings accounts that earn at least three times the average CD rate.
CDs Don’t Beat Inflation
This is the real kicker. Inflation is an economics term that described the tendency for the price of goods to go up over time. Those rising prices can shrink your savings. To avoid losing money, you need to be earning a rate of interest that is equal or better than inflation.
According to recent measurements, the inflation rate is 2.3%. Obviously, an average of .33% is not good enough.
CDs Tie Up Your Money
One of the worst aspects of CDs is that you cannot touch the money until the CD matures. With such poor interest rates, what is the benefit of surrendering your ability to use your money? There are plenty of ways to earn higher rates of interest without tying up your money.
Interest is Taxable
Generally, it’s silly to avoid making money because you’ll have to pay taxes. However, when interest rates are already non-existent, you should take note that you’ll get to keep even less. Federal income taxes your interest earnings as income. For many of you, that between 15 and 25%.
Today we have access to savings bonds, high interest savings accounts, interest bearing checking accounts and Roth IRAs. Any of these options are superior to a CD.
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