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Certificate of Deposit Explained [CDs] & When to Invest in CDs Vs Bonds - YouTube
Channel: Tiffany Thomas, Your Wealth Mentor
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hey there Tiffany Thomas with wealthy
Tiffany dot com and in today's video we're
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going to be talking about CDs
certificates of deposit not compact
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discs because who listens to CDs anymore
okay maybe I have a couple in my car
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still but you guys before we dive in and
talk about CDs and what they are and
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when you should be using them if you are
ready for financial freedom right now
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comment freedom below in the comments or
just give me a random comment to help
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out the YouTube algorithm so more people
can see this video all right let's talk
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about CDs and essentially what a CD is
is a certificate of deposit essentially
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it is an offer that banks or credit
unions have where you can deposit a lump
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sum of money and they will hold that
money for you and pay you interest on
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that money and that can be monthly or
quarterly depending on how the CD is set
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up but they give you a fixed rate they
give you a fixed interest rate that they
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are paying you so it's kind of a nice
way if you want to rely on a certain
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amount of income for your money that
you're investing because with the stock
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market it's going to go up and down if
you're invested in stocks and it's a
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little more risky and bonds if you're
investing in a bond fund then the
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interest rate will also change with that
and depending on what's happening in the
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economy and I can go down quite a bit or
it could even come up but with CDs it's
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a fixed rate and you were locked in for
a certain timeframe which could be maybe
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six months a year two years five years
there's a whole bunch of different
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offers that banks and credit unions have
so depending on your needs for your
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money you can choose a time frame that
you're comfortable with to have your
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money locked in at a bank or credit
union and earning that certain amount of
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interest every month or every quarter
that's essentially what it is so this is
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kind of just reducing risk that may be
associated with other types of
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investments that you could do and you
know the amount that you're going to get
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back for investing
your money because it's a fixed interest
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rate there's all different types of CDs
and some of them will charge a penalty
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if you withdraw that money early if you
were to set up a CD for one year but you
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decided in six months oh I need that
money I want to withdraw it you can
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withdraw it but there is going to be a
penalty and usually it is the interest
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that you would be earning on that money
and it could be that interest for maybe
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three months or a month it depends on
how long your CD is set up for so that
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will vary over time so you could pull
your money out but be aware that there
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is a an early withdrawal fee and some
CDs are actually set up where there's no
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early withdrawal fee but usually the
interest rate that you would be earning
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would be a little bit lower but just
depending on what you want to do with
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your money and how flexible you need
that to be there are options out there
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that do not charge that early withdrawal
fee or penalty and rates vary so don't
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just go to your local bank that you
normally go to or your local credit
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union and ask to ask to set up a CD you
want to do some research online and look
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and see who has the best rates for CDs
because they're going to vary quite a
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bit there are some at credit unions that
may be 1% and then online they could be
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two and a half percent that's quite a
bit of difference
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so really shop around and find which CDs
have the best rates and also some of
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them actually have the CD set up so you
can withdraw the interest that you're
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earning monthly or quarterly but not the
principle that you've invested so if
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that is something that you would want to
do rather than just reinvesting that
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money that you're earning you could pull
that out so you want to shop around and
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see which CD which bank or credit union
is offering the CD that most aligns with
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what you're looking for and I did a
video earlier about bonds and bond funds
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and I had mentioned in that video that
it could be a good idea to and
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and cds instead of bonds depending on
your preference on what you're looking
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for I wanted to share this article with
you that I found online on the finance
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bus and he had invested in a CD and he
does a comparison with a bond fund
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against his money that was invested in
the CD and he did it over a period of
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five years and what he found was the
interest rate that he had on the CD was
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three point zero four percent so each of
the five years that's the amount that
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he's earning that's the interest rate
he's earning and he compared it to the
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Vanguard total bond fund and in the
first year earned five point eight nine
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percent so quite a bit more than the
three percent but then the second year
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was only 0.4% and then it was two point
six three point five six and then a
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negative point zero three percent and
then the overall average was two point
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four six percent for the bond fund
whereas his CD earned that consistent
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3.04 percent so in this case it actually
ended up being better for him to invest
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in the CD rather in that bond fund and
of course it's not always going to work
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out like that but it is just kind of an
option and the way you can think about
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this is you can lock in a CD if there's
one out there that's at a really good
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interest rate you can lock that in for
let's say five years and you have your
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money in there and then when that money
matures you can decide okay well CD
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rates are still really high so I can
invest that money in another CD or
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they've gone down quite a bit so I'm
gonna actually switch over and invest
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that money in a bond fund so it's not
like you're locked in for life and only
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doing CDs or only a bond fund you can do
one or the other or even both at the
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same time just depending on your
preference and how much risk you want to
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have and if you think that the CD can
outperform and I don't want you you know
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making assumptions or gambling when
you're investing your money right just
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kind of think okay on average bonds have
returned two percent up to four percent
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after inflation so if you are finding a
seedy that you know was maybe 3% then
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that could possibly be a good investment
instead of putting your money into bonds
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because of that variation with investing
in bonds and this way you're locked into
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that 3% rate I don't actually know what
the longest length is that you could
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invest in a CD but I wouldn't do it for
a super long time unless I wanted to
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share this with you guys I remember when
I was younger and I I had to have been
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in my teens maybe like eighteen or
something my credit union had a CD that
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was seven percent interest and had I've
known what I know now I would have put a
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ton of more money into that CD and
locked it in for as long as possible
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because the guaranteed 7 percent return
on your money is really good and of
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course I've made more in stock so I
wouldn't put all of my money in that but
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that was such a good return and I didn't
realize what I had right there
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anyway the CDs are no longer quite that
high you just want to consider alright I
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could lock in my money for let's say
three years at 3% and feel good about
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that because I want to mitigate my risk
and maybe you know I'm gonna start
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withdrawing that money I'll be in
retirement in a couple years so I'll
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start withdrawing that money then so
kind of you know look at your situation
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and how flexible you can be with your
money and and then decide okay this is a
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pretty good interest rate on this CD I
can lock that in for two years three
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years and feel good about that and then
I can you know come back when that CD
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has matured and say okay well CDs have
gone up in price and you know maybe I
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want to put in my put my money in
another one for another two years and
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lock that in or if it's the opposite and
they've gone down then you can say okay
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I still want my money to be pretty
secure pretty safe so I can put in a
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bond fund and kind of have that varying
interest rate but I think that would be
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higher
than a CD and keep in mind that you are
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only insured and this is for most
institutions you need to check with the
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one that you select but most
institutions will guarantee a $250,000
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and so if you have any ton of money that
you're going to be putting into a CD you
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know you probably don't want to put in
more than that FDIC insured amount to
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keep your money safe because that's
essentially what you're doing if you're
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investing in CDs or buzz you are trying
to mitigate that risk and you want a
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safer investment so you don't want to go
over that threshold and not have that
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guarantee just in case something was to
go wrong another reason you might be
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investing in a CD is if you are saving
for something in particular
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maybe you want to buy a car in a couple
of years or you want to put a down
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payment on a house in a few years or
take a really cool trip to Israel or
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something you know whatever it is that
you're working toward or maybe you just
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really need help in not having that
temptation of spending your money then
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you can set up a CD for that specific
purpose and you can you know save your
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money that way so that you're not
tempted to spend it on something else
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instead of this goal that you want to be
working toward and so you can put you
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know your money in a CD have it locked
in and realize there's that penalty if
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you try to withdraw it early and it's
also a safer investment so you're not
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worried about losing money when you're
ready to buy that house in two years or
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ready to buy that car in three years so
you have that money set aside and you've
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earned some interest on it and you're
not tempted to spend it elsewhere one
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last point that I want to make is that
you really want to shop around when you
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are looking at CDs because some of the
savings accounts out there especially
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with online banks are actually higher
than the rates and a CD and granted
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savings rates can change over time but
you don't want to be keeping your money
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in something that's not going to be
earning you enough entry
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to make it worth it to lock it in for a
certain timeframe when there's a savings
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account that you can put your money into
and make more interest by putting it in
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the savings account and hopefully you're
not tempted to take that money out of
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that savings account
hopefully it's at a separate institution
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from your normal bank that you use all
the time but you know keep that in mind
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I actually had a friend that met with
her financial adviser and had
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recommended these certain CDs for her to
put her money into and luckily she
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talked to me before she did this because
the rates that those CDs were returning
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were a lot less than just a simple
online savings account and I get the
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fact that that is a locked rate but you
don't really want to be locking your
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money into like a 1% interest rate hour
even a 1.5 interest rate because right
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now a lot of the banks are returning
around 1.9 percent in a savings account
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and you really want to be careful with
what you're putting your money into
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because you know with that money you
could actually put that into the bond
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fund which would be a little more risky
but you would probably earn more money
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than putting it in a CD that's only
worth 1% so being really careful and
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shep around and see what the rates are
on CDs and on savings accounts so that
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you're not locking your money in for you
know another five years at a 1% interest
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rate and especially when you know
interest rates might be on the rise you
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know take that into consideration and
really think ok is this going to be a
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good investment for me right now or are
the interest rates that banks are paying
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are they on the rise so maybe I don't
want to lock in all of this money at
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this current rate really think about
what would be the best possible
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investment and there's a catch to that
because you don't want to do too much
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research and start to feel overwhelmed
and then end up doing nothing with your
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money and just leaving it in your drawer
earning nothing
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so you do want to take action but you
know you can just set a timer
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okay I'm gonna spend 15 minutes
researching CDs and savings accounts see
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what's the best and then just go with it
so you still want to be taking action
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but you don't want to go in blind so you
want to be smart about it there's lots
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of websites out there that will actually
pull in a whole bunch of different CDs
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from different banks or credit unions
and you can look on just one website and
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find you know multiple CDs and then pick
the one that works best for you
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so it's pretty simple to do some
research in a short amount of time
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hopefully this video was helpful in
understanding CDs a little bit and
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knowing what to look for in a CD and
when you're investing your money as well
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and if you found it helpful please hit
the like button and share it with
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someone else who would like to hear this
information and if you guys have other
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ideas about content you would like me to
create for you please put that in the
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comments below and if you already have a
CD you're investing in or a really high
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interest savings account please put that
in the comments so we can share that
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information with everybody and don't
forget to hit the subscribe button to
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subscribe to my youtube channel that
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channel out to more people and I will
see you guys the next video thanks
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