What are the top 7 reasons why I should not open a CD?

Ralph
00:00:00

Have you ever felt stuck between wanting to save your money and feeling like you're missing out on better opportunities? Maybe you're wondering if that certificate deposit offering a guaranteed return is really your best option.

Well, today I'm going to share why putting money in a CD might not be the smartest move for your financial future.

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00:00:21

Welcome to the Ask Ralph Podcast where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your Host, Ralph Estep Jr.

Ralph
00:00:50

[00:00:24] Ralph Estep, Jr.: Thank you for joining me today, I'm going to share some eye opening truths about CDs, and these are some truths that the bank probably isn't telling you. Well, if you missed yesterday's show, I talked about the 7 best ways retirees can spend their savings. We talked about how to make those golden years truly golden and be a good steward of your resources.
[00:00:44] Ralph Estep, Jr.: So if you missed it, I'm gonna encourage you to go check it out. And I'm gonna also encourage you to share it with somebody who will benefit from it.
[00:00:53] Ralph Estep, Jr.: Today's listener question comes to us from Alexandra and she writes this.
[00:00:56] Ralph Estep, Jr.: "Ralph, I've been listening to your show for months now, and I really need your advice. My local bank is pushing me to open a CD with my $50,000 savings, promising a guarantee of a 4.5% return. They make it sound so safe and secure, but something in my spirit is telling me to ask for guidance.
[00:01:16] Ralph Estep, Jr.: What should I do?" Alexandra, that's a great question. And listen, I'm going to start by saying this. I want to be very clear about this. I am not against CDs. I think they have their place. I just want listeners to make more informed and better decisions. So Alexandra, that's what we're going to do. And we're going to talk about the things that banks don't always tell you about CDs. Now, before we dig into your answer to your question Alexandera, I want to remind you that you can submit your questions.
[00:01:45] Ralph Estep, Jr.: Go to justaskralph.com because the truth is the show is all about answering your questions, just like Alexandera's today. So submit your questions, go to justaskralph.com and your question will be on the show.
[00:02:00] Ralph Estep, Jr.: Now Alexandra, your question reminds me of the parable of the talents.
[00:02:05] Ralph Estep, Jr.: Very common bible verse. You probably hear it quoted all the time. It's where Jesus teaches us about being wise with our resources. Like I said, it's a very commonly quoted Bible verse. I've used it many times on the show and it really speaks to stewardship. And it comes right to us from Matthew 25, verses 14 to 30.
[00:02:25] Ralph Estep, Jr.: I'm going to read the whole thing, but I think it's important for today. So "For it will be like a man going on a journey, who called his servants and entrusted to them his property. To one he gave five talents, to another two, and to another one, to each according to his ability. Then he went away. He who had received the five talents went at once and traded them and made five talents more. So also he who had the two talents made two talents more. But he who had receive the one talent went and dug in the ground and hid his master's money. Now after a long time the master of those servants came and settled accounts with them. And he who had receive the five talents came forward, bringing five talents saying, 'Master, you delivered to me five talents; here,
[00:03:13] Ralph Estep, Jr.: I have made five talents more.' His master said to him, 'Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.' And he also who had the two talents came forward, saying, 'Master, you delivered to me two talents; here, I have made two talents more.' His master said to him, 'Well done,
[00:03:36] Ralph Estep, Jr.: good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.' He also who had received the one talent came forward, saying, 'Master, I knew you to be a hard man, reaping where you did not sow and gathering where you scattered no seed, so I was afraid, and I went and hid your talent in the ground.
[00:03:58] Ralph Estep, Jr.: Here, you have what is yours.' But his master answered him, 'You wicked and slothful servant! You knew that I reap where I have not sown and gather where I scattered no seed? Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest. So take the talent from him and give it to him
[00:04:19] Ralph Estep, Jr.: who has the ten talents. For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away. And cast the worthless servant into the outer darkness. In that place there will be weeping and gnashing of teeth." You might be saying, Ralph, dude, that does a harsh verse to end the year, but it's a truth that speaks to truth about biblical stewardship. And Alexandra, it speaks directly to your question.
[00:04:53] Ralph Estep, Jr.: So let's get into those CD details.
[00:04:58] Ralph Estep, Jr.: Well, let me tell you about my client, Martha. Now Martha lost her husband back in 2019, and she got this $250,000 life insurance payout. And she was looking for guidance, you know after meeting with her a couple years later, she said to me, she said, Ralph, my husband always handled the finances. So when she got this inheritance, I didn't know where at the time, she was lost, she was looking for somebody to help her.
[00:05:20] Ralph Estep, Jr.: And I'm going to tell you right now, I don't like banks because I think banks like to sell you products. They're all about sales, they're not about solutions. Well, Martha went into the bank because that's what she knew. And the bank manager said, I'm very sorry about your husband's loss. And I see you've got this $250,000 just sitting in your savings account. And the bank manager said, listen, Martha, I got an idea for, you know, why don't you put that money to work for you. Now again, this is back in 2019. And the bank manager suggested to Martha by a five-year CD
[00:05:49] Ralph Estep, Jr.: and at the time, it was paying 2.75%. That's the APY. And like I said, Martha didn't understand a lot of this stuff. Her husband always handled it. She was lost. She was looking for solutions. And she thought to myself, well, well you know, my savings accounts and we pay them like a half a percent. This is two and three quarters percent.
[00:06:07] Ralph Estep, Jr.: It sounds like a good deal. So Martha agreed. She locked her money in for that five-year CD. Well fast forward a couple years of 2021, and all of a sudden Martha's daughter has this medical emergency. She needs $50,000. And she approached her mom and her mom wanted to help her. So she went back to the bank and the branch manager said, well, that's fine.
[00:06:27] Ralph Estep, Jr.: You can do that but if you do that, you're going to have what we call an early withdrawal penalty. And you're going to lose 12 months of interest. So Martha left the bank, she got on the internet. She saw that I was a local accountant. And she called me and she set up a consultation and came over to see me. And I'll tell you what we did for Martha in a few moments, but let's talk about the 7 key issues with CDs.
[00:06:50] Ralph Estep, Jr.: These are the things, these are the reasons why I think you need to take a pause and think about it. And like I said, I am not against CDs as part of your investment portfolio. I just think there are some things we need to understand. Number one thing, and Martha learned this the hard way. There's limited liquidity.
[00:07:06] Ralph Estep, Jr.: Your money is locked away and inaccessible. Now of course you can get to your money. I want to be overdramatic about this. But it's locked away from the standpoint that you can lose some of the interest you earn. So in that ways, it's inaccessible. And think about Martha's case, it created a serious problem during this emergency.
[00:07:24] Ralph Estep, Jr.: She had to when she wanted to give it to her daughter. But she knew that it was going to be a process and she was going to lose some interest because she's gonna lose 12 months of interest.
[00:07:36] Ralph Estep, Jr.: And around that same issue is the, you know, it could be too you know, being too safe. A lot of people say CDs are safe. I've got one client, that's all he invests in. But that can be risky as well. So first thing, limited liquidity. Second thing. Let's talk about those early withdrawal penalties. They can be substantial if you need to access your money before that CD matures. In Martha's case, I'm gonna give you some real numbers. She faced a $6,875 penalty. Worth of one year of interest. And think about it.
[00:08:07] Ralph Estep, Jr.: You're in a position where you're in this emotional state, you're in a crisis, that kind of thing could devastate a family in crisis.
[00:08:16] Ralph Estep, Jr.: Martha, you know, could have lost $6,875. So that's the second thing. Those early withdrawal penalties. Third thing is lower returns. Now in 2019, 2.75% was actually a pretty good rate. It's not that way today. I mean, rates now you're looking at the CD rates with 5%, 6%. And think about it.
[00:08:36] Ralph Estep, Jr.: We're just now five years into that. So if she was to reprice that now, that wasn't such a great deal. And that's the problem is though a lot of times, those things don't keep pace with inflation, especially as you get into the longer terms. Now if you're doing a one-year CD, we probably won't see inflation like we've seen the last four years.
[00:08:55] Ralph Estep, Jr.: I mean, this is inflation we live with. It was a crazy, like you got 30% inflation a year sometimes. So you got to think about it. You're going to get lower returns and that's where, you know, having a diversified portfolio could offer you better returns. Maybe have a mix of those things. And I'll talk about that in a few minutes.
[00:09:12] Ralph Estep, Jr.: And you can still have that reasonable access to funds.
[00:09:14] Ralph Estep, Jr.: So that's number three, lower returns. As a tax guy, I'm going to tell you, number four, there are some tax implications. When you have a CD like that, you're going to pay interest on the, you're going to pay taxes on the interest that you earn in that year. And if you've got substantial CDs, that can put you in a higher tax brackets. And I say all of that because there are, in my opinion, more tax efficient options available.
[00:09:39] Ralph Estep, Jr.: So that's the tax implications. Number five, there's opportunity cost. If that money is a locked in that five-year CD or that six year CD or three-year CD, you're missing investment opportunities. Maybe something comes about where you can invest in a family business, but you've got that money locked in that CD. And I really think it limits your ability to build wealth.
[00:10:00] Ralph Estep, Jr.: So that's number five, opportunity costs. Six is inflation risk. We talked a little bit about a few minutes ago.
[00:10:07] Ralph Estep, Jr.: Because that real value of that investment erodes over time. And see that safety of they're not, it's not in the market, it's not, you know, it's not out there dangling, you know, that sort of thing and their safety, but the problem is it doesn't protect you against inflation. Talk to anybody who bought five-year CDs back in 2019. And then we saw inflation going through the roof in 2022, 2023, the market adjusted, and they're holding CDs at two and a half, two and three quarter percent,
[00:10:35] Ralph Estep, Jr.: and now the market's paying for four and a half percent. So you need to have a strategy that maintains that purchasing power when you're going through those times inflation. So that's number six, inflation risk. And number seven, not the least of which of the things we need to talk about is reinvestment risk. Because here's the problem.
[00:10:53] Ralph Estep, Jr.: The interest rates might be lower at maturity. You might have a situation where you bought that three year CD at 5%. Now all of a sudden the market's turned, you got to reinvest that money. Now their rates are 2%.
[00:11:05] Ralph Estep, Jr.: And that truly affects. I've got a lot of clients that rely on interesting common and that's their sole source of income.
[00:11:12] Ralph Estep, Jr.: Now they have social security, may have a small pension, but they're relying on that interesting con. And if those interest rates are fluctuating, there's no guarantee that you're going to have enough money to pay your bills. There's no guarantee of maintaining returns. And I was saying, there is no guarantee of anything in this world, to be honest. But I just feel like that is something we need to consider when we're looking at CD's.
[00:11:32] Ralph Estep, Jr.: So let me go back through those again. Number one, limited liquidity. Number two, you've got those early withdrawal penalties. Number three, generally lower returns. Number four, you got those tax implications we talked about. Number five, you've got that opportunity cost, that missed investment opportunities.
[00:11:47] Ralph Estep, Jr.: Number six, we don't talk about that inflation risk, and number seven, that reinvestment risk. So now let's get back to Martha. Let me tell you what we did to help Martha and I, we, I came alongside of her like I do with clients and put my arm around her said, Martha, let me help you with this. So we looked at some strategic solutions. We talked about balancing.
[00:12:06] Ralph Estep, Jr.: I worked with a broker. We balanced her security needs with fund accessibility. We wanted her to have some money that she could go and have if she needed it in these emergency situations. And I also helped her. I helped get involved to help her negotiate a reduced early withdrawal penalty. She actually is working with a credit union and the credit union had in its bylaws that if people had a medical necessity, they would reduce those penalties.
[00:12:30] Ralph Estep, Jr.: So in Martha's case, we were able to get that penalty significantly reduced because she showed the medical necessity of, and the credit union said, you know what? We're not going to ding you for that premature distribution penalty or that early withdrawal penalty because we see the medical necessity of it. We also worked to help build a value aligned investment approach for Martha. We found a trusted financial advisor.
[00:12:52] Ralph Estep, Jr.: She wasn't just going to rely on that guy at the bank anymore. That lady at the bank. Wasn't gonna rely on that bank manager. And like I said, I don't like banks for investments. I think they sell products. They don't sell solutions. And working with her financial advisor, they were able to create a diversified investment strategy that didn't just have CDs.
[00:13:11] Ralph Estep, Jr.: It incorporated her values. Martha's a Christian lady. She has certain value she wanted to go and she wanted to make sure her investments, you know, came alongside her faith. She wanted to maintain those faith-based investment principles.
[00:13:26] Ralph Estep, Jr.: The broker also helped her improve her financial position. He help her put together that her emergency fund.
[00:13:31] Ralph Estep, Jr.: And he actually put that in a high yield savings account where there's no early withdrawal penalties. He also helped her invest in some faith based mutual funds and he still use CDs. He use them strategically. And he allocated that with a broader portfolio. He did some what we call laddering. He kept some of those and she liked the security of that.
[00:13:50] Ralph Estep, Jr.: Martha understood at a basic core level that those CDs didn't have that market risk. They were guaranteed that the money would be there. So, let me tell you about the outcomes of this. And it worked out great. Martha was able to fund her daughter Emily's medical treatment. And to this day, Martha's still a tax client, her portfolio shows steady growth, and she works with her broker.
[00:14:13] Ralph Estep, Jr.: And let me tell you, Martha has become very skilled in this area. And the thing she says to me, Ralph, she says the coolest part of this whole thing. These investments now align with my personal values and I have some financial flexibility. Which I think that is fantastic. So Martha job well done. And I'm going to share some action steps with you in a few moments, but first, are you feeling overwhelmed by your financial challenges?
[00:14:38] Ralph Estep, Jr.: Are you feeling like Martha? You know, you just lost your spouse and maybe you've gotten inheritance. You're like, Ralph, what do I do with this? Or maybe you're buying a home. Maybe you're running a small business. Maybe you're like a lot of Americans, are living paycheck to paycheck. And you just feel overwhelmed. Well let me just tell you, you don't have to walk this journey alone.
[00:15:00] Ralph Estep, Jr.: Like many people, you might be watching your dreams slip away. Maybe you're struggling with mounting debt. You're feeling stuck. You're feeling frustrated. You don't know where to turn. Maybe you're a business person, you're tying to balance business and personal finances. And you just feel lost. You feel overwhelmed. But let me tell you right now, there is hope. If you don't hear anything else I'm saying right now, there is hope. Together we can create a path to your financial freedom while continuing to honor your Christian values. You might say, Ralph, how do you get there?
[00:15:31] Ralph Estep, Jr.: Well, here's how I'm going to get there. And when I help you, I'm going to help you by starting to assess your current situation. We're going to identify where you are. No judgment. Just facts. Here's where you are. And then we'll identify those God-given dreams. Those big, hairy, audacious goals.
[00:15:45] Ralph Estep, Jr.: And they're different for everybody. Maybe for you, it's saving for retirement. Maybe it's saving that you don't run out of money in retirement. Maybe it's funding a college education for your kids. Maybe it's buying that dream home. But we're going to identify those things. And then we're going to try to align your goals with your faith.
[00:16:00] Ralph Estep, Jr.: Make sure that as we did with Martha, that she can say, Hey, Ralph, I'm happy that my investment choices align with my faith. And we'll work to build a personalized financial roadmap this is for you. And I'm going to help you establish accountability and help you track your success. And listen, there are no cookie cutter solutions.
[00:16:18] Ralph Estep, Jr.: There's no some YouTube video you watch or some TikTok video that's going to give you all the answers. But what you will get from me is a practical, faith based approach, tailored to your unique situation. So let me ask you, do you want to break free from debt? Do you want to find financial stability?
[00:16:35] Ralph Estep, Jr.: Do you want to achieve longterm success and grow spiritually while building wealth? Don't let another day pass feeling stuck or overwhelmed. I'm gonna encourage you right now, book your consultation. Now you go to askralph.com. You'll see a icon at the top says, book a call with Ralph. Just click that and let's create your path to financial freedom and spiritual growth together.
[00:16:56] Ralph Estep, Jr.: Again, go to askralph.com and click on that book a call with Ralph. Now lets me get to those action steps I promised. So number one, before opening a CD, no matter what you got going on, calculate your potential need for the funds during that CD terms. So like Martha, she locked that money up for five years because she saw that two and three quarter percent and say, well, that's like 10 times what I'm getting now. But you've got to think about when you're going to need your money. I've talked about this in other shows. This may be a time to do some laddering. And then number two, you want to compare those CD rates with other low risk investment options.
[00:17:30] Ralph Estep, Jr.: They aren't the only game in town and that's where you want to work with your broker. If you don't have one, find one. Don't go to the bank and I'm not bad mouthing banks. But banks sell products. They don't sell solutions. So number three, consider building a ladder of investments. Maybe the CDs are part of that. But I don't want to see putting all your money in that one CD that you don't have access to. And like I said, number four, consult with a financial advisor about alternatives that align with your goals. That's the thing that Martha found out.
[00:17:59] Ralph Estep, Jr.: So there's a lot there, but you know, take a look at what your needs are going to be for six months, for 12 months or 18 months, or 24 months. And build that ladder of investments that gives you that right feeling, that low risk investment, if you're a low risk investor, that gives you good returns, but also gives you that feeling like your goals are being met. On tomorrow, I'm going to be discussing how to start the new year off on the best financial path.
[00:18:24] Ralph Estep, Jr.: We'll Create a roadmap for your 2025 financial success. So remember this as I close today. My passion is to help you achieve financial success. I want to see you live out your dreams and grow in your faith. As we enter into 2025, I wish all of you a very happy new year. And I hope you join me in the journey in 2025.
[00:18:43] Ralph Estep, Jr.: Cause I know together, we can master your finances from that Christian perspective. So be safe out there. Stay financially savvy, and may God bless you today and all throughout 2025.

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