I really don’t get why people buy bank certificate of deposits where there are many different options out there. The Wall Street Journal had an article entitled, “How High-Yield CDs Turn Into 0.05% When You’re Not Looking” and it boils my blood to see how people get cheated but cheating the customer isn’t something new from banks so why do it?
Bait and Switch
The article essentially states that people signed up for that high yielding CD, say 5 percent and assumed that when the CD term expired, they would automatically be rolled into the same or higher yield CD but what happens is the bank puts the money into the lowest paying interest then locks the term at the same time.
So if you signed up for a 12 month CD at 5 percent and it expires and you think it will roll over to another 5 percent CD then you will be seriously disappointed.
Treasure Bills, Notes, and Bonds
A far better thing to do with your money is to buy T-bills either at TreasuryDirect.gov or any brokerage account. If you don’t know how or are intimidated about the process, check out my resources page and watch YouTube gurus walk you through the process.
T-Bills have time lengths anywhere from 4 weeks, 8 weeks, 13 weeks, 26 weeks, and many more. I like buying T-Bills at auction and you can view the auction calendar here.
And if you want longer term instruments then Notes or Bonds may do the trick so I really don’t understand why people bother with bank CDs
Brokerage Money Market
If T-Bills are still too exotic for you then simply letting money sit in a brokerage account such as Fidelity let’s you earn 5 percent for letting your money sit there. You can choose between FZFXX or SPAXX and they are paying 4.95 percent as of the time of this post.
Taxes You Fools!
If you live in a state with a state income tax then bank CD interest is TAXABLE at BOTH the state and federal level so you’ll be paying taxes on interest TWICE. Taxes on interest from T-bills is EXEMPT from state income taxes.
If you live in a state with no state income tax then congrats, you won’t owe state income tax but you will federal income tax on that interest.
Don’t Lend Money To Your Bank
I keep the bare minimum at banks because they refuse to pay any decent interest rate for my money so only what I need to cover the bills is in there and the rest goes somewhere else where my money grows. The Wall Street Journal article states there are $2 trillion dollars in CDs right now, what an unfortunate strategy.