Your emergency fund money should certainly be deposited in a savings account. Here’s why. In case of an unplanned expense, you need access to those funds easily. In addition to what you need for emergencies, you have options when it comes to saving additional money. If you have some money left over, you may consider putting some into a certificate of deposit.
If you open a CD, you’ll get to enjoy a higher interest rate than you would with a savings account. However, CDs come with disadvantages, too. Among other things, you need to commit to locking away your money for a designated period of time. You’ll be penalized with several months of interest if you cash out your CD early.
CDs also have other problems. According to financial guru Dave Ramsey on Motley Fool, CDs have one big drawback that makes them poor investments over the long run.
Expert Opinion on CDs from Dave Ramsey
A CD can be a good option if you’re saving for a short-term goal and want to get a little bit of interest on your money. As an example, let’s say that you’re saving for a down payment on a house, and you figure that it will take two years to buy it.
With your existing down payment funds, you might consider putting them in a one-year CD so you can earn more interest than you can from a savings account. Ramsey suggests opening a CD for short-term savings, but not for long-term savings. In fact, he claims that CDs are little more than glorified savings accounts with a slight increase in interest rates. There is a problem with those rates in that they do not keep up with inflation well enough.
Anyone who’s been balking at sky-high food and gas costs these days is familiar with the impact of inflation. But in recent months, inflation has soared to an extreme degree. Normally, an uptick in living costs is more gradual.
Still, over time, the value of a dollar is naturally apt to diminish, so if you’re saving for a far-off milestone like retirement, you’ll need to invest your money in a manner that can at least keep up with inflation. In that regard, CDs are extremely likely to fall short.
Is there a better option? Consider investing in an IRA or a brokerage account. If you invest in one of these accounts, you could be able to earn much higher returns than you would get from a CD — even when interest rates on CDs are considerably higher than they are today. Steer clear of stunting the growth of your savings.
Conclusively, a short-term investment goes for CD and not long-term or a in life.