Considering the pros and cons of CD renewal
By: Ryan Moore
It’s summer time – the time for family vacations, beach trips, fresh fruit drinks and … renewing CDs?
We are still in a pretty low interest rate environment, which has its perks, but also some downsides. I visited Bankrate.com on July 2, and the highest interest rate I found in the nation on a five-year Jumbo CD was 2.30 percent. Now, that’s not too bad of growth, considering that it’s insured and guaranteed. I’m not too big on the whole “risk versus reward” concept. I love the rewards; it’s the risk part I have problems with. Maybe I’m a sore loser?
The market has been going up, up and up to new all-time highs; what’s that old saying again? What goes up must go ______? Down, right? I won’t say the market is going to go down – I’m not an expert with a crystal ball; I’ll let you be the expert. But I don’t think after all-new highs that it’s going to keep going up. So I think the odds are that that big reward is going down and risk of loss is going up. That makes those safe money choices much more appealing to me.
The problem with CDs? In my opinion, they are not keeping up with the cost of living today. Inflation is around 3 percent. I don’t need a calculator to understand that 2 percent is less than 3. That means in just over 20 years, the spending power of those dollars has cut in half. If I put my money into cash, I am not keeping up with inflation at all. What other choices do I have?
Precious metals? I once heard an interesting fact that if you took all of the gold ever mined and put it all together, it would form one giant cube with dimensions of about 60 feet each way. That just seems small to me. I still have one big concern: Where do I put gold? Do I pay someone to store it for me? Do I buy a giant safe? Do I go dig a hole, practice “midnight gardening” and draw a treasure map? I don’t like those options. Movies about pirates and thieves like “Treasure Island” and “The Italian Job” always come to mind.
If I have a portion of my assets that I want to protect from the possibility of market decline, but still beat the rising cost of living, I typically lean toward investing with insurance companies. How much better can I get than to insure my money from loss? Now, the most common objection I get with this logic is that I’ll lose some earning opportunities, and that may indeed be the case. I’m OK with giving up a little bit of those rewards in exchange for having peace of mind.
The real questions I always ask are, “What’s the purpose of the money?” and “What do I want this money to do for me?” Money, after all, is just a tool, and investments are just a vehicle to accomplish the end goal.