The lure of higher rates
When interest rates rise “savers” and some “investors” get excited about being able to earn more on their money. For twenty years we have seen nothing but low interest rates, with money markets and Certificates of Deposit earning practically nothing. When they start to rise people come out of the hills and everywhere trying park money into the higher rate CDs.
Everyone wants to make sure that their money is working for them and not just sitting idle. While I agree with this, the first step is to identify what is the purpose of the money. Is it to be used in the next 6 months, 5 years or 10 plus years?
Certificates of Deposit should only be used for two reasons: 1) Emergency funds or 2) Short-term needs.
Most people end up using short-term savings vehicles for long term money. You are almost guaranteed to lose money in savings accounts, money markets, and CDs. You’re thinking “But I put money in there not to lose money and have a guaranteed interest rate.” While that is true interest rates on these instruments are at or below the inflation rate, meaning you are losing money.
Driven by Fear
Many people today use CDs to hide in fear of what might happen. What “might” happen? Anything can happen. But hiding in low interest, short-term CDs on what “might happen” is not smart. Your long-term goals are being derailed while living in fear.
Sitting idle in low interest rate CDs or money markets while inflation is at a 40 year high only erodes your money and does not help in any way. Just because a 6-month CD may be paying 4.5% you are still losing money because inflation is higher.
