Why do people get CDs?

Question

Are they just stupid?

A measly 5% a year, for holding your money and not letting you access it? Especially when most start at $2,500 minimum. Our expenses yearly (obviously) far exceed this, and we lose more than 10-15% to buy ANYTHING just by NOT buying things in bulk. Wouldn't you save a lot of money just by shopping around than 5%?

Can't you just resell things on eBay for much more?

Don't tell me "it can be worse" (compared to savings or nothing), my point is "it can be MUCH better". So if your answer is "because I have no better option" then I guess the answer would be "because people are too stupid to know how better to save and invest money".

Anybody saying "just so I don't accidentally spend it" would be like an alcoholic saying "hold my beer money" to prevent himself from being drunk, in other words these people are STUPID and can't control themselves.

Ok, I see some points. But most of us are not 70 so we have time and energy to shop around and invest somewhere else.

Actually i DON'T see CD rates beating inflation, at least not when counting cost of rent, gas, food, office supplies.

And yes, storing food that can be spoiled does cost more, so invest in something that doesn't spoil, like metal, holiday gifts, clothing. Sell what you don't need. Shop around every time you need something. All these are simple ways to save and well over 5% a year while having control over your own money 24/7.

"they don't know better" and "they do know better but chose not to" is same in practicality.

and "because they can't control themselves" is a good reason, but would again fall into being "stupid" about money.

I doubt anybody doesn't know even the simplest things like shopping around, scalping tickets...etc. Whether they're willing spend a few horus a day is the point.

Answer 1

Why??? Safety... and the deposit is insured up to $100K...

You are absolutely correct that they are one of the WORST investments out there in terms of ROR (rate of return), BUT.. they are also the safest...

You pay for that safety by way of lower interest rates....

Answer 2

CDs can be a part of a properly balanced portfolio. The most important part of an investment plan is asset allocation. A small portion should be in VERY SAFE investments, such as CDs. This provides 2 benefits.

1. You have some money to access in an emergency. Yes, you may have to pay an early withdrawal penalty, but at least it is accessible.

2. Since the CD doesn't go down in value, you are less likely to panic in a market downturn. If the market goes down 5%, your investments may only go down 3%. Like it or not, everyone doesn't have the self discipline to simply wait out a market correction.

Answer 3

Hold on there Tiger! "Stupid" is a cop-out for not attempting to understand a financial vehicle. Many huge banks offer this so let's think about why. The CD may not be for you (at all) but here is why is might be a nice option for some people. First let me explain that there are different types of CD's so you may get a penalty for early withdrawal as opposed to 'locking up your money.'

Second, let's say there is a line of *risk* from left to right. On the far left you have the most conservative investment vehicle out there (Cash in your personal safe earning 0%, then say, a savings account, then a CD..). Now as you get towards the middle of the line, you may start to think about investment options such as money market accounts, bonds,etc. At the far right of the line would be your major risky investments - stock, etc.

Third, some people are just plain comfortable with Low Risk or..try this one on. Let's say that you only have access to the money (or want to keep it) for a period of time before you have to give it away or put it somewhere else..or pay taxes..or make a major purchase.

And finally, let's think about the fact that some people have a hard time controlling themselves when it comes to savings. :) They may want the penalty to keep themselves or ? in line with the plan.

There are reasons for it but I gather none of them apply to you. :)

Cheers,

d.marie

Answer 4

I had a CD at one point, and thought it was great. I had been given a gift of a thousand dollars a year before I was to graduate high school (it was intended for college.) By putting that money where I could not access it, I was able to save it for college, plus get a little extra from it. In addition, my bank's interest was a little higher than 5% for CDs. There are other ways to invest money, but for my particular situation, a CD was the best option.

*Jesus, calm down. You asked a question and I answered. That doesn't mean you have to call me stupid. As a teenager, I would have spent that money. If you don't want to get a CD, fine. Don't. That doesn't mean you have to insult people who have one.

Answer 5

People get Cd's because they don't have a lot to start say a money market or get real serious about investing. Or another great reason is that they need to put in away for a short time and make the most they can make in that time. If you put it in say a regular savings account it only gets .50%. A CD is virtually untouchable for the time its locked in for. You can forfeit it but with penalties. Also, I get a lot of elderly with large amounts that don't want to invest it or take the risk of losing it. So they put it in CD's to make money and keep rolling it over and live with the interest made.
And yet another reason people get CD's is that its money left to them by a parent or gaurdian and the state puts it in a cd to make money for that child.
So you see cd's are a good thing for some and for a good reason. One last thing. On most Cd's you only need $1000.

Answer 6

Lots of people use CDs to simply get money out of their hands and not be tempted to spend it. It is also used as a tool to simply preserve capital. However, inflation rates are usually 3-4% so in actuality your real interest rate is somewhere around 1%. You are right in saying that there are better investment options available, people just hate risk. I would only use a CD if you absolutely have to have the money and only use it as a short term investment tool.

Answer 7

CD's are great for the bank......the reason people get them is because they don't know any better. They want to invest and don't know where to turn to get answers, so they go to what they know.......the Bank. And what does the bank do???? they sell them the best product for the bank. Yeah you get a better rate of return than a regular savings account but a money market account is usually equal or better than a CD plus your money isn't locked up.

I like to call them Certificates of Death, or Certificates of Depression. But you shouldn't come in here calling people stupid, just because they don't know. Now if they knew better and still chose the CD to invest in then yes I would call them stupid.

Answer 8

People put money into CDs that they know they won't be needing for a period of time, but want to be as safe as possible.

Some folks putting money into CDs are either risk-adverse, or are simply parking money that will be needed at a later date, and cannot be risked. Yes, the rate of return is low, but the risk is negligible, unlike other investments.

Beyond that, reasons vary. Some folks are deliberately trying to make the money difficult to get at, either to help their own self-control or to give an excuse to someone else as to why they aren't willing to give them money.

(Gee, sorry, Cousin Fred, I realize that your latest investment idea is a sure-fire winner, and I'd love to help, but all my money is tied up right now.)

While the interest rate is low, it is still better than nothing and beats the rate of inflation, so your money is at least maintaining its value.

Certainly CDs are not the best investment for everyone. Younger, more risk-tolerant people tend to invest in other things with a higher rate of return.

The comparison to the extra saved by not buying in bulk isn't entirely valid either. Yes, you'd potentially save more by using that money to buy products that you will eventually need, but then you have to deal with the issues of storage and potential spoilage.

For example, I could buy a case of, say, black olives and save 20%, but then I have to deal with storing them, and if I don't use a lot of olives all the time, many of those cans will go far past their "best by" dates.

Answer 9

Many people who invest in CDs are not savy about other options. Some are saving for a big purchase in the short term e.g. deposit on a house, wedding etc and they are wise enough not to put that money at risk. Others have a large % of their assets in stocks and need to have some money in safer products. Investment grade bonds are barely paying 5% and government bonds are paying less.

Answer 10

5% compounded interest annually is not bad when you consider the risk of losing your investment is very low, which is something you cannot say if you invest in stocks or bonds.
Selling on ebay is not an investment. And you also have to consider what your time is worth. It costs money to list an item on ebay and it doesn't always sell.

Answer 11

CDs provide a person with a higher interest rate then a savings account. Therefore when you let the money sit....you get more back in a CD than leaving it in a savings account. You can get a CD in monthly or yearly incriments. Check it out at your bank to see if your rates are good.