Most people know what a CD is, but let’s give a quick definition: a CD is a certificate of deposit which is an agreement between a consumer and a financial institution, such as a bank, where the amount deposited, the time frame and the interest rate are all specified and agreed upon. And, yes, CDs are considered a safe place to keep your money.*
Although they are considered safe, how are interest rates on CDs today? Currently, the average rate for a one-year CD is 0.25% and the average rate for a five-year CD is around 0.79%. Isn’t that exciting? Now, those numbers are a national average according to bankrate.com.** So to make it simple, let’s say you get a CD for 1%. There are a couple of factors to consider with this 1% CD.
First off, let’s consider inflation. As of now, the government says inflation is about 1.5%. I’ll let you be the one to decide if it is higher than that or not because, historically, it is around 3% to 4%.*** So if it is 1.5%, you are already in a negative situation. You are not even able to keep up with inflation with a 1% CD.****
Next, let’s consider taxes. For 2013 and the future, the maximum rate to be taxed is increasing from 35% to 39.6%. This makes it even harder to really earn anything on this 1% CD. With inflation and taxes now taken into consideration, you are not earning anything on CDs today. If anything, most people in a CD are possibly going backward instead of forward.
So how are the interest rates on CDs today? Not only are the interest rates on them significantly low, but when you take into account all of the factors with CDs, you are most likely not earning much of anything. Let us show you a way to possibly earn more and keep it just as safe as a CD.
Scott Turney and Turney Financial Group, LLC; Sparta, TN. Insurance licensed in 51 jurisdictions.
*Bank Certificates of Deposit are insured by the FDIC up to $250,000 per depositer.
**Date figures for CD rates were pulled off of Bankrate.com
***The information provided was gathered from the following sources:
****If you are unable to access any of the material we referenced, please call 1 (866) 240-8972 to request a copy.