Certificates of Deposit: What to Consider and How to Use Them - Replay

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast. So the question is, does it make sense to lock in CD rates while rates are high? If you have money sitting in a bank account that you don't need and the CD rate is offering a higher rate than your savings, then I would consider it as an option. But here's the thing, if you think rates are going to continue to rise then you would want to stick with shorter maturity dates. But if you believe rates have topped out, then locking in a longer term CD could make more sense.

Well, hey everybody and thank you for listening and joining us today. We hope that this podcast can provide you with some insights to help you grow and get closer to your goals this year. But before we get started, be sure to subscribe to this podcast. That way you'll be notified about new content and you'll be able to listen to Brian tackle a variety of different topics so you can subscribe on Apple Podcasts, Spotify, Stitcher, Soundcloud, pretty much anywhere that podcast can be found. And all the links to subscribe as well as past episodes are available on the website@Brian Scribonia.com so thanks again for tuning in and let's get started.

Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion.

And the whole teaching there is about.

Preparedness and being ready.

There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host, Brian Scribonia. Thanks for tuning in and let's get into today's topic. In an economic climate marked by rising interest rates, there is a renewed interest in bank CDs. But with trust in banks dwindling and convoluted reserve requirements, the question does persist. Should you invest in CDs? And like most things, it depends on your needs and goals. But most of all, it's important to understand the product you're placing your money into before choosing to deposit money into a CD. And I understand that a bank CD may seem as basic as the ABCs, but I find that many people have little knowledge or understanding about why banks issue them, how they're used, and how they're priced. This may not seem all that important, but the truth of the matter is it is and has a lot to do with building wealth. Because wealth isn't created by buying a CD based on a rate. It's created by understanding why the rate may not be all that Important. I live just south of St. Louis, Missouri, and like many rural communities, there are banks and gas stations at every corner city seemingly right on top of each other. And as I drive around town, I see banks promoting the rates on digital boards, much like gas stations who post their price per gallon of fuel. When one bank increases the rates, it often seems like all the other banks follow suit and they raise their rates. But there is more to this than banks watching to see what the bank down the street does. Just to stay competitive, banks use what is known as the federal funds rate, also known as a benchmark rate. This is the rate banks charge one another to borrow money overnight that's needed to maintain reserve requirements. Further upstream in the decision making process is the Federal Open Market Committee, or fmoc, who meet throughout the year to discuss and set monetary policy. And within these policies, rates are set and are most likely linked to inflation. And when rates are set, banks may adjust rates on loans, deposits and certificates of deposit. But just like any business, banks will adjust rates to compete in their market as they seek to cover their costs and maintain a profit. They of course use rates to attract more customers, to help expand the number of depositors they have, which is a indicator of growth. And the added deposits, of course, helps to cover the loans they originate. I discuss more about how banks work in my podcast what to Know about How Banks Work, and I'll link to that podcast in the show notes. But CDs specifically are an attractive tool for banks because unlike a deposit a account, CDs actually lock up customers with a maturity date, which just gives banks better control of their cash flow. And we see customers drawn to the opportunity to capitalize on higher rates as they seek to maximize their returns. But when you look at the math, the rates really don't matter all that much. Okay, they matter some, but they don't matter as much as the difference between inflation rates and interest rates. And here's why. If inflation is running at, let's say 7% and interest rates are, let's say 5%, the net of this, of course, is 2%. And if inflation is, let's say zero and rates are at 2%, the spread is still 2%. So it's easy to get enthusiastic about higher interest rates on deposits. But we can't take our eye off the ball. Inflation is the enemy. It is the headwind that erodes our purchasing power. And it's why we should pay attention to the net return after inflation. From a debt standpoint, the increase in rates is impacting lending. It is Why? I believe that rates are unlikely to remain elevated for long. When you consider the gridlock within the housing market and the amount of debt our government holds, it's hard to believe rates can remain elevated over the long term. The government is desperately trying to combat inflation by raising rates. They have a 2% inflation target and want to see unemployment higher, which doesn't make sense for the average person. But it is all about price stability. When there are more jobs available than unemployed workers, theoretically everybody could get a job and with that people spend money. But if the economy cools, business and theory would stop hiring and with higher unemployment, spending slows. But here's the deal. These higher rates not only impact consumers, but it also impacts the government. According to the Congressional budget office, or CBO, in June of 2023 they projected that annual net interest costs on the federal debt would total $663 billion in 2023 and almost double over the next decade. Interest payments would total around $71 trillion over the next 30 years, taking up to 35% of all federal revenue by 2053. These numbers are impacted by interest rates and with lower rates come lower interest payments. Regardless of our opinions, theories and preferences, we know that the economy runs in cycles and the cycle we are in will transition at some point. So the question is, does it make sense to lock in CD rates while rates are high? If you have money sitting in a bank account that you don't need and the CD rate is offering a higher rate than your savings, then I would consider it as an option. But here's the thing, if you think rates are going to continue to rise, then you would want to stick with shorter maturity dates. But if you believe rates have topped out then locking in a longer term CD could make more sense. Now of course I don't have a crystal ball. If it were me, it would be advisable to look at money market rates and fixed annuities to compare rates across the board as these types of accounts often share similar rates rates but they are all differences to understand before making a decision. Certificates of deposit are offered by banks as a savings account that offers a fixed interest rate over a specified period of time ranging from one month to up to five years. They carry penalties if funds are removed before maturity and they are FDIC insured up to $250,000. Fixed rate annuities are issued by insurance companies and are financial products that offer a fixed interest rate over a specified period of time. Early withdrawals can incur a penalty. Interest earnings are tax deferred until you start taking distributions and the guarantees are backed by the claims paying ability of the insurance company and are insured by what is known as the State Guarantee Association. Then you have money markets, which are funds issued by financial institutions that are backed by highly liquid short maturity investments, maturities that usually range from overnight to just under a year. Assets can be quickly converted to cash with minimal loss of value, generally considered more risky than a bank, CD or insurance company annuity. And the underlying investments include such things as treasury bills, commercial paper and CDs. And the rate does have some sensitivity as interest rates and monetary policies can change, so navigating the financial markets in general can prove to be a challenge, especially during times of uncertainty. But while CDs offer safety of fixed returns, they are not devoid of risks and limitations. It's essential to understand both the micro and macroeconomic factors that affect CD rates before diving in. And as always, a balanced portfolio features a mix of different products and strategies and can be the most prudent strategy in times like these. By working with professionals who are keeping an eye on economic indicators and who understand the implications of various government decisions, they can help you make informed decisions about where to place your money. To learn how to make informed decisions regarding which investments to choose, which options are appropriate for your situation, and where to look, you can access a multitude of resources on my website@Brian Scribonia.com that concludes today's show. I'm Brian Scribonia. Thank you for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

Well, thank you for listening to the Forbes top 10 rated common sense Financial Podcast. Before you go, I want to encourage you to jump over to Brian Scribonia.com to access the full archive of blogs and podcasts. And if you want to be the first in line to get new content, you can sign up for free on the Brian Scribonia website as well. If you're not following Brian on all the social channels, we'd love to have you join in on the conversation. Instagram, Facebook, LinkedIn, Twitter. He's there. Lastly, if you've enjoyed listening to today's podcast, or if you have found value in any of our content, help spread the word by sharing our videos, podcasts and posts wherever you get them. We greatly appreciate it and are Glad that you took the time to join us today.

Securities offered only by duly registered individuals through Madison Avenue securities, llc Member FINRA and SIPC Advisory Services offered only by dually registered individuals through Scribonia Wealth Management, a registered investment advisor. Tax Services offered only through Scribonia Tax Consulting. MAS does not offer build banking or tax advice. Scribonia Financial Group LLC Scribonia Wealth Management LLC Scribonia Insurance Services, llc, Scribonia Tax Consulting and Build Banking are not affiliated with mask. Scribonia Wealth Management LLC is a registered investment advisor. Advisory services are only offered to clients and prospective clients where Scribonia Wealth Management LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk including the potential loss of principal Any references to protection, safety or lifetime income generally referred to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying ability of the issuing carrier. This podcast is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. Build Banking is a DBA of Scribonia Insurance Services, llc. Benefits and guarantees are based on the claims paying ability of the insurance company, not FDIC insured. Results may vary. Any descriptions involving life insurance policies and its use as an alternative form of financing or risk management techniques are provided for illustration purposes only, will not apply in all situations, may not be fully indicative of any present or future investments and may be changed at the discretion of the insurance carrier, general partner and or manager and are not intended to reflect guarantees on securities performance. The term build banking, private banking alternatives or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life insurance companies are the same as traditional banking institutions. This material is educational in nature and should not be deemed as a solicitation of any specific product or service. Build Banking is offered by Scribonia Insurance Services, LLC only and is not offered by Madison Avenue securities, llc. Our firm is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US Government or any governmental agency. The information and opinions contained herein provided by the third parties have been obtained from sources believed to be reliable but accurate. Accuracy and completeness cannot be guaranteed by our firm. References to Build Banking, private banking alternatives or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life insurance companies are the same as traditional banking institutions. This material is informational in nature and should not be deemed as a solicitation of any specific product or service. Build Banking is not FDIC insured. Build Banking is offered by Scribonia Insurance Services, LLC only and is not offered by Madison Avenue Securities, LLC nor Scribonia Wealth Management, LLC.