Episode Transcript
[00:00:00] Speaker A: In this episode, we talk about why certificates of deposit are making a comeback.
[00:00:03] Speaker B: And whether you should ever consider them for your finances. Let's get started.
[00:00:08] Speaker C: Let's get some money from new money new problems. It's the new money new problems. Um, podcast. A show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation. Purchasing your first investment property. Helping your family with money. The highs and lows of, uh, entrepreneurship. New money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the new Money New Problems podcast.
[00:00:46] Speaker B: Hello.
[00:00:47] Speaker A: My name is Brenton Harrison of new Money new problems and your host for the new Money New Problems podcast.
[00:00:51] Speaker B: Hope that you all are enjoying the.
[00:00:54] Speaker A: Last, uh, stretch of the summer if you're like me, enjoying the first few.
[00:00:58] Speaker B: Mornings of a cool breeze.
[00:01:00] Speaker A: Because I'm not ready for, like, fall, fall yet. But I don't mind waking up in in the morning and it being like in the high sixties, low seventies for the first time in a while. Before we get started with this week's episode. Cause I don't think it's gonna take too long, I want to make sure that you all, ah, are on our.
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[00:02:40] Speaker A: Like I said, I don't think it's going to be too long of an episode because my take on it is pretty straightforward. We're here today to talk about certificates of deposit. If you're not familiar with the certificate of deposit, you probably don't have anybody.
[00:02:52] Speaker B: In your life who's over the age of 70 years old or you've just had your head in the sand over.
[00:02:56] Speaker A: The past year or so, because old people love them and younger people are.
[00:03:01] Speaker B: Being pushed cds at an increasing rate.
[00:03:03] Speaker A: And today we're here to talk about why. Why do old people love them?
[00:03:08] Speaker B: Conceptually, a certificate of deposit is something.
[00:03:10] Speaker A: Where you give your money to a lending institution, to a bank, and you.
[00:03:14] Speaker B: Give it to them for a certain term of time. It could be three months, could be six months, could be 90 days, it could be 18 months.
[00:03:20] Speaker A: And in exchange for locking up your.
[00:03:23] Speaker B: Money for that period of time, the bank gives you a guaranteed rate of return. It's not a variable rate of return, it's a fixed rate of return.
[00:03:30] Speaker A: It's a contract between you and the bank that says, for example, during this.
[00:03:35] Speaker B: Six month period, I'm going to give.
[00:03:37] Speaker A: You my money and you as a.
[00:03:39] Speaker B: Bank are going to give me 5%.
[00:03:41] Speaker A: Back on the money that I give you that's tied up here for the next six months. So pretty straightforward in terms of what they're offering.
[00:03:48] Speaker B: What's less straightforward is in terms of.
[00:03:50] Speaker A: Getting your money out, there's going to.
[00:03:52] Speaker B: Be varying degrees of penalties to access.
[00:03:55] Speaker A: Your money before that period expires.
[00:03:59] Speaker B: If you had a six month CD and for some reason or another three.
[00:04:02] Speaker A: Months into that six month term, you.
[00:04:04] Speaker B: Need to access some or all of.
[00:04:06] Speaker A: Your money going to pay a penalty.
[00:04:07] Speaker B: For doing so before that term has expired. Now, the rates that banks use to.
[00:04:12] Speaker A: Figure out what they're going to offer.
[00:04:13] Speaker B: To their customers when it comes to.
[00:04:15] Speaker A: Cds, they can vary by a number.
[00:04:17] Speaker B: Of different economic factors. But the biggest thing is they're going to look at other interest rates that.
[00:04:22] Speaker A: Are relevant to them as a bank. And in periods like this, when you see high interest rates all over the place, right?
[00:04:27] Speaker B: You are not only seeing high interest rates on mortgages, high interest rates on student loans, high interest rates on car loans.
[00:04:34] Speaker A: You're also seeing high interest rates for.
[00:04:36] Speaker B: Things like what you would get with a high yield, say, savings account.
[00:04:39] Speaker A: So it's not all bad news in.
[00:04:41] Speaker B: Terms of what the cost of money is that you would get or pay in this economy. But the interesting thing about cds is.
[00:04:48] Speaker A: As interest rates have risen, you would.
[00:04:51] Speaker B: Obviously expect CD rates to rise as well.
[00:04:54] Speaker A: But that doesn't mean that things behave like they have.
[00:04:57] Speaker B: In my opinion, in the last year.
[00:04:59] Speaker A: Or so, interest rates have increased multiple.
[00:05:02] Speaker B: Times during the 15 years that I've been in this industry. But for some reason, within the last year, when I meet with clients and.
[00:05:10] Speaker A: They are the of client who tells me something after they've done it, as.
[00:05:13] Speaker B: Opposed to asking my advice before they take a step, I keep coming across high income earning clients who have had.
[00:05:21] Speaker A: Some type of liquidity of it.
[00:05:23] Speaker B: Maybe they sold an investment for a profit, maybe they sold a house and there for some reason have funds that have been left over that they haven't put into the next house.
[00:05:33] Speaker A: Whatever the case may be, if they've.
[00:05:35] Speaker B: Had this liquidity event, I keep coming across clients who have put some of those funds into a CD before they asked me, and now all of a sudden they have this huge chunk of cash that has a six month period where it has to be locked up in the CD, or a twelve month period or an 18 month period.
[00:05:53] Speaker A: And they'll ask me after the fact, oh, what do you think about what I did with that money? Well, after the break I'm going to.
[00:05:59] Speaker B: Tell you what I think about cds. I'll give you a hint. It's not positive.
[00:06:04] Speaker A: But I also want to talk about.
[00:06:05] Speaker B: Why a bank might be pushing cds now in a way that they haven't done so in the past and get.
[00:06:12] Speaker A: To the bottom of whether it is.
[00:06:14] Speaker B: Always don't put your money in a CD or whether there are actually periods where it may be useful.
[00:06:20] Speaker D: This is the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:06:39] Speaker C: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news.
Weve crafted the new money new problems gap finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended familys finances could pose to your household, please head to newmoneynewproblems.com gapfinder to complete it today. Again, thats newmoneynewproblems.com gapfinder. To take the assessment.
[00:07:18] Speaker D: You'Re listening to the new money new problems podcast. Subscribe now at new Moneynewproblems.com. welcome back.
[00:07:28] Speaker A: Welcome back.
[00:07:29] Speaker B: Before the break, I gave you kind.
[00:07:31] Speaker A: Of a hint that I'm not the biggest fan of certificates of deposit, but I did not tell you why. So let's get into why. The biggest reason I'm not a fan of certificate of deposit in most economic.
[00:07:42] Speaker B: Instances is when you compare the rate of return that you get with a CD, which locks up your money to.
[00:07:49] Speaker A: The rate that you would get with.
[00:07:50] Speaker B: A high yield savings account.
[00:07:52] Speaker A: There's not typically much difference. And to prove this to you, I.
[00:07:55] Speaker B: Want to bring up articles from the same institution. So the first article that you see on screen, we'll put this link in.
[00:08:00] Speaker A: The show notes, is from bank rate and it's titled best certificate of deposit rates for August 2024.
[00:08:08] Speaker B: You see that the first one listed.
[00:08:10] Speaker A: Is from Marcus by Goldman Sachs. They're offering 4.88% as a guaranteed rate of return for a period of one year. So you lock up this account for a year. You pay a penalty if you access it early, but if you keep it.
[00:08:23] Speaker B: There for a year, you get 4.8%.
[00:08:26] Speaker A: The next one is from America First.
[00:08:28] Speaker B: Credit Union, three month CD 5.25%.
[00:08:32] Speaker A: The next one is from Synchrony bank, nine months 5.15%. The next one from Sally, May 13 month CD 5.05% interest. To be clear, these are great interest rates.
[00:08:45] Speaker B: And the one thing that you get with the CD that you don't get with a high yield savings account is with a high yield savings account. It's a variable rate of return. The bank can increase or decrease the rate that they're giving you for your.
[00:08:57] Speaker A: Deposits based on what's going on in the economy. The positive to having a certificate of deposit is you sign up for this rate and you're guaranteed to get this rate throughout the entirety of the period. So that is a positive when compared.
[00:09:10] Speaker B: To high yield savings accounts. But let's look at the rates that you can get with high yield savings accounts. Again, this is from bank rates. Best high yield savings accounts of August 2024.
[00:09:20] Speaker A: You can see American Express 4.25% Barclays.
[00:09:25] Speaker B: Bank 4.5% Brio Direct 5.3% UFB Direct 5.15% bread savings 5.15% there is either no lag in the difference between what you're getting in a high yield savings account as compared to a CD, or the lag is minimal, less than half a percent. And if you're putting, say, even $10,000 into a CD, then half a percent difference between that CD and a high yield savings account is literally $50 on a $10,000 deposit. So in my mind, if that CD.
[00:09:59] Speaker A: Is for, say, twelve months, why would you lock up your money for twelve.
[00:10:02] Speaker B: Months and pay a penalty if you.
[00:10:03] Speaker A: Need to access it early as compared to putting it in a high yield savings account?
[00:10:07] Speaker B: Also, you could get an extra $50.
[00:10:10] Speaker A: On a $10,000 deposit.
[00:10:12] Speaker B: The juice isn't worth the squeeze. So while there is the possibility that.
[00:10:15] Speaker A: You have a high yield savings account.
[00:10:17] Speaker B: That'S paying you 5% now and six months from now, it's only paying you 4.5% or 4%, I would much rather you have the ability a month from m now or two months from now to be able to access all of.
[00:10:29] Speaker A: That money when needed, as compared to.
[00:10:32] Speaker B: Trying to figure out a penalty that.
[00:10:33] Speaker A: You would owe by accessing a CD early. But that doesn't answer the question of, uh, why is a bank pushing this.
[00:10:39] Speaker B: In the first place?
[00:10:39] Speaker A: Because to me, and I actually have.
[00:10:41] Speaker B: Talked to some banking friends about this, it doesn't make sense.
[00:10:44] Speaker A: And I'll tell you why. If you look at how a bank makes money, it gets a little more complicated than this.
[00:10:50] Speaker B: But bear with me. This is basically the crux of how.
[00:10:52] Speaker A: A bank makes money. You give deposits to a bank. A bank then takes those deposits and they lend that money to consumers of the bank through lines of credit, through.
[00:11:02] Speaker B: Mortgage loans, what have you.
[00:11:04] Speaker A: And the goal of that bank is.
[00:11:06] Speaker B: To receive more interest on the loan.
[00:11:08] Speaker A: Than they are paying you out in deposits. So, for example, if you have a lot of loans that on average are.
[00:11:15] Speaker B: Paying you 4%, and you're only giving out 2% interest to your depositors, then.
[00:11:19] Speaker A: You'Re getting a 2% spread on the.
[00:11:21] Speaker B: Money depositors gave you that you then turned around and loaned out to your customers. But here's the thing. Banks can make money on high yield savings accounts, but it's not guaranteed. Let's go to the scenario where you.
[00:11:34] Speaker A: Might have a bank that has a.
[00:11:35] Speaker B: Lot of old loans on the books from 20 19 20 20 20 21.
[00:11:41] Speaker A: Where those people who borrowed money are only paying two and a half, three, three and a half percent on the loans that are coming back into the bank as revenue. But a bank has a high yield.
[00:11:51] Speaker B: Savings account at 5%.
[00:11:53] Speaker A: So they're making two and a half, three.
[00:11:55] Speaker B: But they're giving out 5% in interest. There is the possibility that they could lose money on a high yield savings account. It doesn't always happen.
[00:12:03] Speaker A: They sometimes keep that spread and they're.
[00:12:05] Speaker B: Profitable, but it is possible to lose.
[00:12:08] Speaker A: Money on that savings account. So to me, when I'm thinking about it, I'm like, well, you have a.
[00:12:13] Speaker B: High yield savings account at many banks that are not promoted very strongly.
[00:12:17] Speaker A: As a matter of fact, I typically.
[00:12:19] Speaker B: Have to ask clients, hey, they told you to put your money into a CD.
[00:12:23] Speaker A: Did you even ask them if they.
[00:12:24] Speaker B: Have a high yield savings account?
[00:12:26] Speaker A: They go back to their bank and voila, their bank has a high yield savings account that they never told them about, but they did push them into.
[00:12:33] Speaker B: A CD and told them to sign up as quickly as they could.
[00:12:36] Speaker A: That doesn't make sense to me because.
[00:12:38] Speaker B: At least, like I mentioned, with the.
[00:12:40] Speaker A: High yield savings account, if interest rates.
[00:12:42] Speaker B: Go down, they can just lower the rate of interest that they're giving to their depositors. But when a bank offers a CD, that's a contract.
[00:12:49] Speaker A: When they sign someone up for twelve months and they tell them that they're.
[00:12:51] Speaker B: Going to pay them 5%, they have to pay them 5%. So I'm wondering, how does this make sense to the bank?
[00:12:58] Speaker A: And then I reached out to a friend of mine. Uh, I did not ask for his.
[00:13:01] Speaker B: Permission to identify him, so I'll just read what he sent me instead of sharing his name.
[00:13:06] Speaker A: So he first said, and I quote.
[00:13:09] Speaker B: Banks don't always lose money on high yield savings accounts. But when interest rates spike very fast, the margin, margin between interest paid to depositors and the interest earned on fixed rate loans can compress quickly, which challenges profitability. That's where I'm talking about, where it's like the rate shot up on the.
[00:13:26] Speaker A: High yield savings account and all of a sudden you are costing yourself a lot of money to your depositors, but.
[00:13:32] Speaker B: You'Re not making as much of a.
[00:13:34] Speaker A: Spread when it comes to your loan revenue.
[00:13:36] Speaker B: He said, that's certainly been the case in the basis point spike we saw.
[00:13:39] Speaker A: In rates most recently. In addition, depositors had more options for.
[00:13:43] Speaker B: Yields in terms of short term treasury notes and other investments that have shifted balances from banks to these other investment vehicles.
[00:13:51] Speaker A: So while the rate environment is a.
[00:13:52] Speaker B: Challenge, maintaining liquidity has also been a challenge. So that's why you still see the aggressive rates, end quote.
[00:14:00] Speaker A: Let me break that down in layperson speak, what he's saying in this. Yes, it's a possibility that you could lose money on a high yield savings.
[00:14:08] Speaker B: Account or a CD, but it's not guaranteed.
[00:14:11] Speaker A: But when you look in this interest.
[00:14:12] Speaker B: Rate environment, when you have banks closing.
[00:14:14] Speaker A: Like a Silicon Valley bank, because they.
[00:14:17] Speaker B: Did not have enough in reserves, then.
[00:14:19] Speaker A: If you're a bank, you're facing a.
[00:14:20] Speaker B: Potential profit crunch, but also a, uh, potential liquidity crunch where you may not have enough reserves to meet your obligations.
[00:14:27] Speaker A: And when you're in a period like.
[00:14:29] Speaker B: That, you become less concerned, although still.
[00:14:31] Speaker A: Concerned about that spread and more concerned.
[00:14:34] Speaker B: With keeping as much money on hand as you can to make sure that you're liquid.
[00:14:39] Speaker A: And while it is possible to lose.
[00:14:41] Speaker B: Money on a CD, you can still make money on a CD. But the one thing that it is as compared to a high yield savings account, is sticky year. It is harder to take a CD.
[00:14:53] Speaker A: Out of the bank than it is.
[00:14:54] Speaker B: To take a high yield savings account.
[00:14:56] Speaker A: And in this environment, as my friend.
[00:14:58] Speaker B: Is sharing, they are seeing a lot.
[00:15:00] Speaker A: Of people take money out of their savings account and put it into short.
[00:15:03] Speaker B: Term treasuries and put them into bonds.
[00:15:06] Speaker A: And put them into all these different.
[00:15:07] Speaker B: Investment vehicles that are housed outside of a bank.
[00:15:11] Speaker A: So when a bank has a person.
[00:15:12] Speaker B: Who'S depositing funds with them and they.
[00:15:14] Speaker A: See a big cash deposit hit their account of 1025, 5100 thousand dollars, they have the option of telling them about.
[00:15:22] Speaker B: That account that's paying 4.5%.
[00:15:25] Speaker A: But that person may also be comparing.
[00:15:27] Speaker B: It to a treasury that's paying higher or another high yield savings account at.
[00:15:31] Speaker A: A bank that's paying a, uh, half.
[00:15:33] Speaker B: A percent or a percent higher than what they're offering.
[00:15:35] Speaker A: And even if they sign up for the high yield savings account at that bank, it's unlikely that they have any.
[00:15:41] Speaker B: Restrictions that will prevent them from just moving it three or four months later. But if they have a CD, that CD has an interest rate that they receive, but they only receive it if they keep it there for the entirety of the period. So it gives the bank a more dependable path to revenue, or at least an expectation for liquidity that they can look at as compared to the high yield savings account.
[00:16:04] Speaker A: So to me, is this worth it to the consumer?
[00:16:06] Speaker B: I would say in most cases, no. I don't think that there's much value.
[00:16:10] Speaker A: In locking up money for any period.
[00:16:12] Speaker B: Of time at 5% as compared to.
[00:16:14] Speaker A: It not being locked up and getting 4.75%. In most cases, you're talking about a few thousand dollars.
[00:16:21] Speaker B: Even in larger amounts of money, the.
[00:16:23] Speaker A: Spread just isn't that much to make me in locking up my money.
[00:16:28] Speaker B: Now, uh, there are some scenarios where there are times when the rates that are available for high yield savings and cds have a bit more of a gap.
[00:16:36] Speaker A: And in that period of time there.
[00:16:37] Speaker B: May be things that you can look.
[00:16:38] Speaker A: Into, like cd ladders, where instead of.
[00:16:41] Speaker B: Having these long periods of cds, twelve.
[00:16:43] Speaker A: Months, six months, nine months, you put.
[00:16:46] Speaker B: Your money in a ladder of continuously rolling cds.
[00:16:50] Speaker A: So for example, you might have a.
[00:16:52] Speaker B: Portion of your funds in a three month CD, and then as soon as it finish, it rolls into another three month CD and so on and so forth.
[00:16:59] Speaker A: And this is something that you even.
[00:17:00] Speaker B: See with most banks.
[00:17:01] Speaker A: As a matter of fact, if you.
[00:17:03] Speaker B: Sign up for a CD at a.
[00:17:04] Speaker A: Typical bank, it will have a mechanism.
[00:17:06] Speaker B: In there where they're required to alert you before your period expires. But if you don't tell them to.
[00:17:12] Speaker A: Take your money out of that CD at the end of the period, it automatically rolls into another one.
[00:17:17] Speaker B: But typically that's going to be a similar link CD.
[00:17:20] Speaker A: So if you sign up for a six month CD, you don't alert them.
[00:17:23] Speaker B: To the fact that you don't want.
[00:17:24] Speaker A: It to roll over, it automatically rolls.
[00:17:27] Speaker B: Into another six month CD. Whereas with a CD ladder, you may be able to use shorter increments, so that even if some of the money is locked up while still in a CD, there's a constant role where money is becoming available at regular intervals.
[00:17:43] Speaker A: So you don't have to worry as much about that liquidity. I will tell you, even though that's a better scenario, it's rare that I.
[00:17:49] Speaker B: Come across it for a younger investor.
[00:17:51] Speaker A: So if you're the typical person listening to this podcast and you're between the ages of 35 and 55, I wouldn't.
[00:17:57] Speaker B: Consider that something you needed to do.
[00:17:59] Speaker A: If you're someone who is in your.
[00:18:00] Speaker B: Sixties and seventies and you're looking to just know that six months from now or a year from now, you've received.
[00:18:06] Speaker A: A guaranteed rate on the money that you've deposited, maybe now we have a.
[00:18:09] Speaker B: Conversation that's worth having.
[00:18:11] Speaker A: But all in all, I'll finish my.
[00:18:13] Speaker B: Hate fest on cds and I'll just.
[00:18:14] Speaker A: Say they're not the worst thing in the world. But it's rare that I come across.
[00:18:18] Speaker B: An investor who's young who needs it. I would much rather you put your.
[00:18:21] Speaker A: Money into a high yield savings account.
[00:18:23] Speaker B: Or a brokerage account and give yourself.
[00:18:25] Speaker A: The opportunity to earn an even higher rate of return pending you having emergency funds that put you in a position.
[00:18:32] Speaker B: Where you can afford the potential loss on some of those invested funds as well.
[00:18:36] Speaker A: So that's it. If you're not on our email list, like I said, I would encourage you.
[00:18:40] Speaker B: To do so so that you can get the guide to income driven repayment plans that's coming out next week. Hope you guys enjoy the rest of.
[00:18:46] Speaker A: Your weekend, and I will see you.
[00:18:47] Speaker B: Again in seven days.
[00:18:49] Speaker C: Talk to you then from new money new problems. This was the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
