When Should You Consider CD Investing?
If you don't have any discretionary income (income over and above your living expenses and debt payments), then CD investing, or any other type of financial investing, should not be your first priority.
Your first priority should be to create discretionary income. To do that you will need to do one of the following:
- Lower your living expenses and/or debt payments.
- Increase your take-home pay.
- A combination of #1 and #2.
If you have discretionary income, but you don't have an emergency savings account equal to 3-6 months of your income, then CD investing, or any other type of financial investing, should not be your first priority.
Your first priority should be to direct a significant portion of your discretionary income into a type of savings account that doesn't have early withdrawal penalties, for as long as it takes to build up an emergency fund equal to at least three months of your income.
If you do have discretionary income, and you have established an emergency fund, but you also have high-interest debt, then again, CD investing, or any other type of financial investing, should not be your first priority.
Your first priority should be to invest in your debt.
Your return on investment of paying off your high-interest debt can be five to ten times greater than that of even a high yield certificate of deposit -- especially if you consider that you won't have to pay taxes on the money you earn (save) from paying off debt ahead of schedule.
If you have discretionary income, an emergency fund, and no high-interest debt, only then should you consider CD investing. Of course, investment brokers will give you all kinds of reasons why you shouldn't consider CD investing.
What Brokerage Firms Want You To Believe About CD Investing
In their attempt to get you to invest your money into an investment that will reward them with commissions and fees, investment "advisors" will be quick to point out that CD investing exposes you to what they refer to as "inflation risk."
The idea behind inflation risk is that if your money is not achieving a return on investment higher than the rate of inflation, you will be going backward financially. While this is certainly true, inflation risk can be no more harmful to your net worth than the added risk that comes with high yield investments.
Thanks to the promotion of concepts such as inflation risk, I know many people who lost virtually all of their life savings since that fateful day on September 11, 2001 (some lost their homes as well).
Meanwhile, people who limited their investing to low-risk or government insured investments (such as CD investing and debt investment), certainly experience a marked reduction in their return on investment, but they didn't lose a single dollar of their principal. And since people like that tend to have little or no debt payments, a reduction in income is far less of a concern for them.
Who Should You Listen To For Investment Advice?
The bottom line when it comes to who you should listen to when it comes to deciding where to invest money is to listen to your gut feeling and common sense. At the very least, ask yourself the following questions:
- Will a commissioned broker truly hold my best interests over their own?
- Do I really want to risk losing the money I worked so hard to earn and sacrificed so much to save?
- Does the notion of making money without having to work for it fit into the category of "too good to be true?"
- Sure, some people took huge risks in the stock market and won big, but how many do I know personally?