Long Term Bank CD’s (certificates of deposit): Should I Invest?

April 26, 2010 1 Comment »

Although we’ve seen long term CD rates tick upward ever-so-slightly over the last month or so, we still maintain the stance that you should resist the urge to move forward with these products based on tiny rate hikes.

Many banks have been throwing their net out into the plentiful sea of eager savers in an attempt to catch a fresh batch of customers using their small rate hikes as bait. Sure, earning an FDIC insured 3.0% per year might seem favorable to those looking for the best CD rates – even if it means keeping your money tied down for 3-5 years – but you must look beyond the tiny increase in gains. While the highest yielding long term CD’s might seem attractive for the first year or two, the latter years will leave you with very little (if any) gains.


First, almost all financial analysts suggest we are headed towards a time of rather steep inflation (not to mention a 3% inflation rate is considered average by most analysts). The only debate on this matter is WHEN it will kick in.

Second, taxes paid on interest and investment gains stand to eat at your more handsome looking profits in the short term.

And third, we are at the end of a steep valley in savings rates. And as a general rule of thumb, you normally want to lock in long term CD’s when the market has peaked and is beginning to trend downward, not the exact opposite – which is what we are currently enduring.

Not convinced? Still think long term CD’s are a good investment strategy? Take a look at Chuck Jaffe, of MarketWatch.com’s article entitled “Stupid Investment of The Week: Don’t go long on CD rates now” for further evidence.

In the article he suggests seeking a “rewards checking account” if you are looking for an FDIC insured investment vehicle with phenomenal returns and decent flexibility – a suggestion we made early this year by proclaiming Rewards Checking Accounts as the best FDIC insured investment vehicle of 2009.  After you’ve learned the basics of those accounts you can stack them up against the current 5 year CD rates to help you make an educated decision.

Additional Note: We also think cash back checking accounts are a great way of having your money work for you by providing monthly dividends in the form of cash back.

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  • Guy G.

    Hey you are so right about CD’s. We call them GIC’s here in Canada, for Guaranteed Income Certificate. I refer to them as Guaranteed Insufficient Cash.

    The reason is, that statistically, they under perform compared to equities. Yes, they are guaranteed and secure, but if you factor in inflation your buying power is often eroded. Especially if it’s not invested in a registered retirement vehicle, it will be further eroded by taxes.

    Anyway, thanks for sharing,