When it comes to savings, there are a variety of ways to invest your money. For those who are of a conservative nature, Certificates of Deposits (CDs) are one of the more popular choices; however, just because something is popular, doesn’t mean it is a good decision. In fact, in this current market environment, I would argue that there is rarely a situation where a CD makes sense. The argument can be made that instead of investing in a CD, it might be better to invest in bottles of Coca-Cola.
Certificates of Deposits are generally made available by banks or credit unions and are offered as an alternative to savings accounts. The primary difference, however, is that typically CDs have a maturity period and there are penalties for withdrawing the funds within that time period. By locking up your funds, the bank or credit union is willing to pay you a rate that is more competitive than a savings account.
The reason so many people are attracted to CDs is that they are insured, which makes them very low risk. Deposits held at banks are insured up to $250,000 by the FDIC. Credit Unions are insured by the NCUA for the same amount.
The problem is pretty simple and straightforward. Because of historically low-interest rates, CDs are paying close to nothing and are lagging inflation significantly. Below is an example of current interest rates from Chase.com.
Even using one of their larger CD products, the rates are abysmal. You would have to lock up your money for 10 years before barely making it above 1%.
How does Coca-Cola fair against inflation? Looking at a bottle of Coke in 1956, the price was 5 cents. Today it is priced at $1.79 which would mean that is has returned nearly 6.6% annually during this time period. Since inflation alone has been 3.75% since 1956, Coke has done a fantastic job of keeping its value over time.
While I wouldn’t recommend running out and buying cases of Coca-Cola in your retirement accounts, I do think it is worth pausing and thinking about what will maintain value over time. I would strongly suggest that CDs are not the answer and that there are better ways to invest to make sure your money doesn’t lose out to inflation.