Why You Should Avoid CDs

with the surge in interest rates over the last couple years uh CDs or certificates of deposit have become really popular with Savers and those looking to part cash again but I'm just not a big fan my name is Scott Caufield I'm a CPA and CFA charterholder and I am the founder of Sophos wealth management so what is it that I don't like about CDs well first of all I mean let's look at what a CD is it's just a deposit at a bank or credit union that pays a fixed rate of interest over a specified time period typically anywhere from a month to several years as much as 10 years there's a few reasons that I'm not a big fan of CDs so first is liquidity uh the only way to get your money out is to typically surrender interest on shorter term CDs you might give up three months of interest on longer dated you might have to give up as much as six months of Interest so it's fairly punitive to get your money out there's also credit risk so you your any deposit over 250k which is the FDIC limit is uninsured which means you are an unsecured creditor of the bank now we've seen with the bank failures this year the svbs the first republics all these things that have kind of blown up uh Banks aren't as risky as we might have thought or are riskier than we might have thought and I don't like anyone being an unsecured creditor of a bank I think there are safer Alternatives especially when this is considered for most people they're very safe cash uh the next thing is taxes so all your interest on CDs is going to be taxed both at the federal and then state and local levels if that's applicable to you there's also a call risk so especially for CDs that are held at brokerages they can be called sometimes now that will happen in an environment in which interest rates are dropping meaning the CD will be called and you'll have to reinvest in a vehicle with much lower yield so obviously that's not ideal so what do I tell people to do instead I think treasury bonds are just a much better alternative not only is a yield higher and you can see in this chart the short-term treasury bill yield is typically as high or quite a bit higher than the typical CD but on almost every other metric I think they are superior so here's just a look at the yields on treasuries this is as of early June they typically are going to trade quite a bit higher than CDs but if we look at those same metrics that we looked at on the CD so liquidity the treasury market is the most liquid Market one of the most liquid in the entire world so you can easily buy a bond sell a bond get your money right back out there's no penalty there's no credit risk by and large the US is considered the risk-free rate so U.S treasury security is considered one of the safest assets of the world even with the debt ceiling Shenanigans aside the the concern that you're going to get paid back if treasuries aren't paying you back you've got bigger fish to fry and bigger problems there's also a tax advantage so you will pay federal taxes on Treasury interest but you will not pay state or local taxes there's no call risk and treasury Securities they're pretty easy to buy you can just set up an account with treasurydirect.gov you can purchase a security paying no fees you'll get the same rate that big Banks and large institutional investors will get the only drawback is that you can't sell on Treasury direct.gov you'd have to transfer that to a brokerage and sell the treasury there but frankly that's not very difficult to do and if you're going to go through the hassle of setting up a bank account to buy a CD it's not any more problematic than that so in general I just think treasuries are a much better alternative to CDs they they give you I think they're better in just almost every single metric that you might look at so if you're ever interested in talking about your situation your financial planning scenarios your Investments be happy to do a free consultation and things thanks for tuning in

Channel: Sophos Wealth Management, LLC

Views: 29,337

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Id: IPcWBq7E5Aw

Length: 4min 21sec (261 seconds)

Published: Tue Jun 13 2023