Is a CD a worthwhile investment?
Question: Should I consider a CD as a worthwhile investment? I am 26, work for a neat nonprofit, paid off my car in 1 year and plan to be paying student loans for 20 years. I have about $5,200 invested in stocks and mutual funds (most of which is split between a Roth and a traditional IRA). I have another $1,000 I’d like to invest. Should I continue with IRA contributions and modest stock purchases or consider something like a CD? The thing is, my online savings account APY is higher than the CD rate. I guess a third option is paying down an additional $1,000 on my student loans. What should I do? Thanks! Michael, Salisbury, MD
Answer: You can’t go wrong, since all the options you’re considering will add to your savings. Here’s a way to think it through that might help you decide.
A certificate of deposit can be a worthwhile investment. It’s a good option to consider for the safe savings part of your portfolio in most circumstances. However, you’ll earn a fraction of the yield in the current interest rate environment. From your question, I am assuming the CD would be in a taxable account.
I would consider putting the money into your online savings account instead. The reason is that, with a CD, you lock in a low rate for a stated period of time. If interest rates rise in the meantime as the economic recovery gains momentum — and it’s a big if — you won’t benefit from higher rates until the CD matures. Your online savings should adjust fairly quickly to reflect rising rates. Of course, if the economy loses traction, rates will likely stay low and you’ll still make little on a CD or online savings account.
One way to answer your question is to decide the best use of the savings at the moment. Are you financially stable right now? If so, it’s OK to tie up the savings in a long-term retirement savings account. Or should you bolster your emergency savings and opportunity funds — money you want easy access to without paying a penalty? You’re building your career and it’s financially smart to have a sum of money set aside to weather any setbacks — and more importantly, to take advantage of an investment, job, or lifestyle prospect that comes your way. I would put a priority on deciding between these two options.
That said, I know lots of people who can’t wait to get out from under their student loans. It’s an emotional and psychological priority. If you do decide to accelerate payments on your student loan, I would designate the money toward paying down principal and tell your student loan lender that’s what you want done.
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.