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“Should I invest in CDs or a Roth IRA?”

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[Update]: See below for some great (and controversial) comments debating my stance that bonds are not for young people.

Sherene writes:

I am a recent college graduate and I want to put the little money I have saved (approx $3,000) into something that will give me good returns over the years. Would you suggest I get CDs or a Roth IRA?

The two are very different.

A Roth IRA is an investment account, but once you get it, you have to put money in it and invest. You can read all about it on my article The World’s Easiest Guide to Retirement Accounts.

A CD is a type of investment, which you can buy inside (or outside) of any investment account. And if you’re wondering what I think about CDs/bonds…

Bonds aren't for young people

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32 Comments on "“Should I invest in CDs or a Roth IRA?”"

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Matt
Matt
8 years 2 months ago

NO bonds at all? what is your age cut off? I’m 25 and have 10% of my asset allocation in bonds. Too much?

Evan
Evan
8 years 2 months ago
That’s a hilarious picture! However, what about getting a compounded rate of return? Investing in index funds will provide a better yearly rate of return number, but you are dealing with major market swings and potentially taking major losses that take years to recover (2001 for instance). Bonds stablize a portfolio and protect you on the downside. A cliche’ example would be that a portfolio that goes up 20% & down 10% repeatedly would be outperformed by a portfolio that goes up 10% every year. The gain percentage is the same, but the dollar amount you are compounding on is… Read more »
Henry
Henry
8 years 2 months ago

I agree with the majority of what you say on this blog but this is the first time where I think you’ve said is completely wrong. There is nothing wrong with CD’s for young people if used properly. I’m 26 and I have my 6 months of emergency funds laddered in CD’s so that one matures each month and gets reinvested. This allows them to accrue more interest than sitting in a regular savings account and gives me access to the money when I need it.

David
David
8 years 2 months ago

Personally, I use Muni bonds in my brokerage account while the funds are in holding to go into my Roth. Once in my Roth, they’re sold and ETFs purchased. Simple reason why I do this: lower my tax liabilities at the end of year, and increase my tax-effective return.

AJC @ 7million7years
8 years 2 months ago
Hmmm … when I look for investing advice, I usually look to the best in the business. That’s why I went to Warren Buffett’s Annual General Meeting in Omaha. He suggested that IF you don’t really know what you’re doing, that you should dollar-cost average (that means put a little bit over time) into little pieces of all of “American Business” … he later clarified that to mean a low-cost Index Fund (in fact, he named Vanguard). Why? Well inflation will keep your CD’s worthless … by buying and holding Index Funds (LOW-COST ones) for a VERY LONG time, the… Read more »
Presh
8 years 2 months ago
I like how brief yet complete the answer is. It is interesting to see the financial world has managed to confuse people for things that are very different. On a critical note, I find the image to be disturbing. I understand your point about motivating people, but I would hope there is a better way. Are half-truths the only path to action (or 85% as you say), and does the whole truth really sound overwhelming and lead to complete inaction? I live on the premise that people can handle the truth. Bonds are an important investment category. It’s not any… Read more »
B Smith @ Wealth and Wisdom
8 years 2 months ago
Wow, the comment about CD’s and bonds is bound to create a firestorm of response. Usually I agree with your advice, but this time I think it is too sweeping. It is too one size fits all and personally I disagree. There are times to put your money in a CD even if your are young. For example, you can get a better return for short term savings (car, college, etc). It can also be a place to park your money when the market is too volatile for your risk tolerance. While a money market is a good option, sometimes… Read more »
Kay
Kay
8 years 2 months ago
When I first moved out on my own, I knew about checking accounts and savings accounts. My Nana started talking about CD’s and so I asked her what they were. After minimal advice, I called around and invested in a short term CD. That was the FIRST investing I ever did and it was easy. Eventually, I learned how to ladder CD’s. I understand your point on one level, but CD’s are so easy I don’t see any reason for a new investor to shy away from them. I certainly don’t advocate putting all your money into CD’s, but to… Read more »
Blair C.
Blair C.
8 years 2 months ago

Wow. Okay, I really need some more, clear, easy education on my finances. Ramit, when is your book coming out already!?

Nathan
Nathan
8 years 2 months ago
I generally agree with Ramit on this issue. The point is to simplify the solution. If the question is being asked, the simplest solution will not be to invest and explain CD laddering. The priorities should be some type of emergency fund (high yield is optimal) and then throw some money toward the future in the simplest way. There are enough years to complicate the situation. I would say in this instance the individual should put the money into a savings account as emergency fund, bubble, whatever you want to call it. But it should remain liquid and accessible. If… Read more »
ekrabs
ekrabs
8 years 2 months ago
I’m mostly in agreement that one should stay away from bonds…. Interest rates are appalling right now. Why would you want to lock in that? That means Treasuries aren’t very pretty, especially if you consider current levels of inflation. I-bonds you say? They pay 0% right now. The story is pretty much the same with CDs. My mom loves CDs. Why in the world, I’ll never understand, but then, she’s also much older and has far more conservative risk tolerance, so I guess that’s OK for her. About the only thing I like for right now is select muni-bonds, which… Read more »
John
John
8 years 2 months ago

Two words come to mind: “Purple Cow.”

Interesting advice, Ramit–definitely on the edge. I like it. (but I don’t want anyone to confuse “I like it” with “I believe it” or “I agree with it”)

Regina
8 years 2 months ago

I’m a new college grad-
What if you’ve maxed out your ROTH IRA’s monthly investment?? And stock options?? What should I invest in?

By max out, I mean, investing the most without paying taxes.

Miguel Pakalns
8 years 2 months ago
I’m most appalled to see an “investment advisor” advocating under-30 individuals putting any investment % whatsoever, under any circumstances, in bonds. Ramit is correct re: CDs and Bonds, they’re not for non-uber-wealthy under-30s — To all the “I keep my savings fund in CDs” investors, you have to set up this equation properly: If you were fired tomorrow (that is why we have our “rainy day” fund, in essence, isn’t it?), would you need to cash a not-yet-matured CD? If so, how much interest would the CD be penalized for early withdrawal? Then compare the interest earned on the CDs,… Read more »
ekrabs
ekrabs
8 years 2 months ago
Regina: Congrats! You’re doing rather well! This probably isn’t the best.. ahem.. forum for answer that kind of question, and it would really help to have more details regarding your current financial portfolio. However, as a general rule of thumb, if you’ve exhausted all of your tax-deferred options, feel free to continue with taxable accounts then. Especially if you’re still in the 15% income tax bracket, where your capital gains tax will be minimal…. If not, there are tax-efficient avenues you can pursue such as growth investing if you’re aggressive or muni-bonds if you’re conservative. Um, but again, I’d hate… Read more »
Cashola
8 years 2 months ago

Hahaha, the pic is hilarious. I would say that you are right in him going with his Roth IRA. Even though i’m young, i’m still aiming to allocate 20% into bonds. I know it’s a Textbook method, but it will help me sleep a little easier at night.

Jonathan B.
8 years 2 months ago
This reminds me of some cocky know-it-all financial kid I had in a math class recently. He was like, “yeah, bonds are a great investment for young people.” I argued that index funds were probably a better choice long-term. He also disagreed with me when I said you can withdraw your original investment from a Roth IRA if needed without penalty. He was like, “trust me I know this stuff. You can’t do that.” He then went to Wikipedia on his phone to “show me,” only to find out that he was wrong. I just gave a little smile and… Read more »
Kierthi
Kierthi
8 years 2 months ago

Ramit, I have been faithfully following your blog for quite some time now. I’m a recent graduate with a student loan and credit card debt and just starting out on a new job. Your blog was the first place that got me started on taking care of finances after school. Thanks for your inputs.

I would love to hear from you/ or read a post on your favorite brokerage firm and why you prefer them. Thanks.

Ryan S
Ryan S
8 years 2 months ago
I’m glad you’re in to the whole “perfect is the enemy of the good” ideology. But writing off bonds because we’re wrong and people don’t understand them is ridiculous. If simplicy is your goal, tell your readers to invest in target retirement funds. It’s one fund, so it’s just as easy as, say, an SP500 index fund, but you’re actually diversified across asset classes and countries. FOR YOUR IRA, IF YOU ONLY BUY ONE FUND, BUY A CHEAP TARGET RETIREMENT FUND. ekrabs, i bonds pay 0% “real”. They still pay inflation at over 4%, which is better than almost any… Read more »
evie
evie
8 years 2 months ago

The key point in this question is that this 3k is the “little money she has saved” just out of college.

This money should be kept liquid as an emergency fund. Online savings accounts are great for this (they have higher interest rates than CDs, no penalties, and no minimums).

Then she should open a Roth IRA, and fund at least a small amount monthly to get started.

Jonathan F.
Jonathan F.
8 years 1 month ago

So your argument against CDs is that they are so difficult to understand, they discourage people from investing all together and therefore should be avoided? Instead open a brokerage account and invest in the those less confusing securities, like mutual funds, ETFs, and stocks? Please, enlighten me.

Rusty
8 years 1 month ago

You would rather someone go into a target-date fund (with it’s fees) for simplicity? Fidelity has got to be loving you. I agree that youngsters should focus on equities for the most part, but to not buy fixed-income investments for short-term goals and as a guaranteed return when markets drop and low positions make liquidity a bit tight is irresponsible. A few years ago, my 20-something friends were all into equities. Now, a lot more of them are very happy with boring fixed-income and non-volatile preferred stock. It takes getting burned only once to change your tune.

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[…] 2. Retirement accounts: A Roth IRA means less taxes later. – A 401k lets your company invest pre-tax money and will give you cushy old age.  Matching is great; it maxes out at $15,000/yr; set it up so that an amt is automatically withdrawn from every paycheck. The world’s easiest guide to understanding retirement accounts – “A Roth IRA is another type of retirement account. Every person in their 20s should have a Roth IRA. It’s simply the best deal I’ve found for long-term investing.” Should I invest in CDs or a Roth IRA […]

Dave
Dave
8 years 1 month ago
Hey Ramit im only 17 n got 2 more months till ill b 18. N most of this stuff is very fucking confusing 2 me but i want 2 learn it cuz as soon as i turn 18 i plan 2 put money in2 some kind of investment. The problem is i dont have much money at all i just want 2 get started right away 2 start making money n hope i can get in2 the bigger bucks from their. So if u would please help me out n let me know what would be my best investment 2… Read more »
E
E
7 years 11 months ago

I’m 59 1/2 and my 401k is in the dumps, can I cash it out and put the money in cd’s without a penalty?

Jim777
Jim777
7 years 6 months ago
How can a CD be bad? You cannot loose money with a CD however with stocks, mutual funds, etc. we have all seen what happened in 2008. Sure stocks go up but they also go down and the fees and complexity of stocks make them a challenge for the average person. A CD however is SO EASY to invest in. If I had $800,000 today, I would invest all of it into a Single 4% 1 year CD. Then I would just sit back and collect my $32,000 guaranteed profit in 1 year when it comes due. Then, after collecting… Read more »
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