Certificates of Deposit or CDs are a great place to put money, right? Well, the answer depends on if you are the bank or the customer.
As a customer you give the bank your money and agree to leave it there, at the risk of a penalty, for a certain period of time, usually anywhere from three months to five years. In return, you are paid an interest rate that is much better than a savings account or money market rate.
The bank takes your money and loans it out to other people at an even higher interest rate and makes a profit on the difference. The bank makes more money but they also deserve to profit. They guarantee your money and take the risk that a potential borrower doesn’t pay it back. The bank’s reward is justified for the risk they take and the guarantee they offer depositors.
So far, it looks like a fair deal. In simple form, each party should be happy with the terms. Look beyond that relationship for a moment to see what else is going on outside that relationship. Your money is safe, no doubt, but are you really getting ahead.
Most people don’t realize that money is susceptible to many eroding factors. Among these, taxes and inflation are two of those factors I would like to focus on.
I think we should buy a CD, hold it for a year and adjust the earnings for taxes and inflation and see how much we have left. Let’s start with $100,000.
Assumptions:
4% CD interest rate
3% inflation
40% tax bracket
1 Year
Initial Investment = $100,000
Plus 4% Interest = $104,000
Minus 40% Tax on the income= $102,400
Minus 3% Inflation on the BALANCE = $99,328 Purchasing Power 1 year later!
Wow! That is not an optical illusion. In this scenario, after one year in a CD where inflation is a realistic 3%, the power of your money has actually decreased.
The inescapable truth is that inflation can make any investment look a lot less desirable. If you want safety, you must find a place for cash that moves ahead of the rate of inflation. Taxes make that job even more difficult. As popular and safe as bank CDs are, I am sorry to have to tell you that if you buy one, you are doing nothing more than losing money safely.
If you are looking for nothing more than a safe haven for cash with a little interest, you must get as much out of your money as possible. Depending on suitability factors such as age, amount of investment relative to overall portfolio, investment time horizon and the future use of the money in question, fixed annuities can be a great alternative.
The rates of return will usually double the going rate for CDs while maintaining a premium level of safety when invested with the right company. In addition, annual taxes are deferred so the account has more money compounding which leads to another advantage over taxable CDs.
Consider the needs and desires you have for your investment dollars. Be critical and look at every angle you can. It is possible to protect your money from the markets and still achieve reasonable growth. CDs, while they have many uses, are not going to allow you to be competitive with your investment dollars.
Find out more about Annuities Vs CD’s at AnnuityStraightTalk.com
Adams Green owns the Advance Annuities and offers <a
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