Personal Finance 

3 Ways to Beat the Return of a CD

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The challenge is out there. Financial writers love to trash the CD and the savings account but in an economy that is taking people’s wealth faster than our credit cards, we can’t put our money in to just anything. The CD and the savings account are safe but they won’t make you any money. Still, though, if we’re going to snub the CD, shouldn’t we give our readers some alternatives? Today we’re answering the call. Here are three ways to invest your money that will make you more money than a 3 year CD.

The Certificate of Deposit

First, the challenger. The certificate of deposit has safety behind it. Even if the bank that holds your CD were to be shut down, the FDIC will make sure you get every dime of your money back. Two of our three alternatives are equally safe because they aren’t investments at all. They carry no risk. The highest yielding CD we found at the time of this article had a yield of 1.53% so all of our options will yield at least 1.53%. Here we go!

Your Debt

Instead of putting your money in CD, pay off your debt. Maybe not your mortgage but all of those credit card bills, car loan, student loans that have a low balance, and the loan you have for the big TV in the living room. It would be better to pay off your debts before investing because that is an investment that has no risk and pays very well. Chances are these loans are at least 6% and probably considerably higher so put us down for our first score.

Refinance Your Home

If you are planning to stay in your home for a long period of time and you haven’t refinanced since 2008, you could save, on average $2,000 per year. The average mortgage rate in August of 2008 was 7.00%. Now, you could get a mortgage for close to 4%. That’s much more than 1.53% even with the mortgage fees so we’ll take another point. Of course there’s a chance that you won’t qualify for a refinance but if President Obama has his way, a lot of people will be able to refinance their mortgage even if they have bad credit or an upside-down mortgage.

Dividend Stocks

If you’re not a stock picker, you may not be comfortable with this option but consider asking for help from a qualified fee based or fee only advisor in your area. Some stocks don’t have large price movements even in bad market conditions and as a result, pay you a dividend to hold them but for stocks held for the long term, you will see a rise in the stock price along with the dividend payment. A stock like Verizon or AT&T pay dividends of more than 5% as of this writing. It’s not hard to find high quality companies that pay dividends well over 1.53%. Ask your financial advisor to set a tight stop. A stop causes a stock to automatically sell if it drops a certain percentage in value. A stock can have almost no risk if you set the stop very close to your purchase price.

Although we’ll claim victory on this challenge, remember that the first rule of investing is, don’t lose money. It’s better to put your money in a low yielding CD that makes little to nothing than it is to put it in an investment that ends up resulting in a loss. A 0% gain is better than a 1% or more loss. Do with your money what makes you comfortable and resist the peer pressure from people like us who think you should do more.

{ 7 comments, please add your thoughts now! }

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7 Responses to “3 Ways to Beat the Return of a CD”

  1. Excellent suggestions. I’ve started focusing my retirement planning on dividend-paying stocks… slow and steady wins the race.

    Another option that I’ve been using are “investment notes” through a financial program that my denomination (church) offers (Church Extension Plan). While the notes aren’t getting me HUGE returns – they surpass CD’s, have never lost money… and I know my investment is helping something I believe in.

    I’ve been looking into “peer-to-peer” investments as well… but that certainly ups the ‘risk-factor’.

    Thanks again for the great post! Love your blog!

    • dn says:

      Be careful with church extension plans. I attended a church and discovered that it took out 5 mortgages on the property through them for well over twice its value as per city assessor. These mortgages were NOT in conjunction with building on – one was for a remodel but the church raised the funds to do the remodel but pastor took out a mortgage anyway. Why would CEP allow 5 mortgages within 13 years on the same property????

  2. daenyll says:

    I’ve paid down almost 10k of student loans because it’s a guaranteed net for me. I’ve also tried a small investment with lending club, slightly risky, but you can choose which loans you’re willing to chance on and it’s done reasonable for me so far. And the first rule with any investment risk is don’t put in anything you can’t afford to loose. So know what your risk tolerance is and is likely to be in the near future.

  3. nickel says:

    Seriously? Dividend stocks as an alternative to CDs? These things are entirely different beasts with hugely different risk profiles. Presumable, if someone is holding money in cash, there’s a reason. And that reason is unlikely to be to compatible with putting the money in the stock market.

    Go look at a price chart for AT&T, which was suggested as an option:

    And zoom out a few years. Sure, you’re getting a fat dividend, but the price swings wildly. That being said, the suggestion to use a stop-loss order at least limits your exposure on the downside — but it also kicks you out of the investment.

  4. Scott says:

    I agree with nickel – dividend stocks are not really an alternative to safe, low-yielding CDs. As a better alternative, I would recommend a bond fund like BND or, even, LQD. The dividends are better than CDs, and, sure, the price fluctuates a bit, but not nearly as much as stocks.

  5. dave says:

    Stocks have high risk, the S&P 500 return was -37% in 2008. With stocks you have to pay corporate income taxes, capital gains taxes, dividend taxes etc which diminishes your return.

    If you have a credit card then you can easily get a guaranteed tax free return of 12% by paying it off. If you have a mortgage then you can get a 5% return which is greater than the 5yr CD at 3%.

  6. timparker says:

    Even the best CDs aren’t going to get you over the average rate of inflation and where are you going to get a 5 year CD at 3%? Also, let’s not forget that a CD has interest rate risk, inflation risk, etc. Their lack of liquidity is a huge problem in an environment where mico and macro economics are changing so rapidly.

    Now,if we want to talk about 5 year performance, which has seen a larger depression in value? CD interest rates or AT&T? The answer is the CD. You can’t say that AT&T was volatile due to a broad market event but not apply the same standard to the CD.

    Finally, you can’t blindly compare a stock to the index and you also pay taxes on the money made on a CD.

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