Are CDs a Scam?
Just relax and hear me out. I know everyone likes to use CDs because it’s easy. There are times when it makes a lot of sense and I’ll talk about that too. Short-term options are an interest rate gamble and taking a one or two year deal is a good idea if you expect interest rates to rise. This is something I talk to people about when choosing any type of annuity but I’ll bet you don’t get bank employees doing that type of financial planning. Some people put way too much into CDs and no one bats an eye. It’s the kind of thing that could get me into trouble and investment guys are similarly restricted. But let’s not get too far off track because there are a few points I want to make.
I don’t blame anyone for not wanting to dive into the complexity of other financial products and instead take the simple route with a CD. It’s a way of keeping money safe and it kicks the can down the road. If all you plan to do is park money for a rainy day, it’s not the only thing you can do. Flexibility is an issue for any real planning opportunities and often the terms are short so you don’t get compounding of the interest either. This is one of the biggest issues that I’m not sure people realize.
In the past few years interest rates are better on everything. I’ve talked to dozens of people who decided to quit analyzing annuity options and just decided to park the money in a CD for a while. Most commonly I heard that people were really excited about 12 to 16 month rates. When they could get in excess of 5% they took the short term deal. What no one ever says is that you don’t get compounding interest with only one year. Maximizing safe assets requires two variables and only one of them is the interest rate. You also need time in order to get the exponential effect. On $100K, the difference between 5% and 4% is only $1000 in a year but it’s almost $15,000 over a ten year period.
For quite some time the short-term rates were higher than those with longer terms. It’s an inverted yield curve. Longer commitments are supposed to get higher payouts but that wasn’t the case. I know a lot of people saw the rate alone and thought it was the best deal and that’s not the case.
I always asked what the plan was after one year. Most said that they would just renew the contract and get another one for the next year. That all works just fine if rates are stable. It’s smart if rates rise over that year and it’s a bad idea if rates fall. That is exactly where we are right now. Anyone who is locked into MYGAs for a longer term is well ahead of the game. Short-term CD owners are seeing lower rates so that strategy didn’t work out. Several people have said this to me in the past few weeks and that’s really the only reason I’m talking about it now. The good news is that you can still get good MYGA rates because annuities are not directly linked to Fed reductions like bank products are. I’m working with someone now who can increase their yield by more than 1.5% and it’s going to make a substantial difference for them.
CDs are most suitable for funds that are earmarked for another purpose within a couple of years. And if you can’t make a longer commitment for one reason or another then by all means stick with the bank but you need to understand the potential consequences. Aside from having some easily accessible money with low penalties for early termination there really are no advantages to using CDs. Please don’t bring up FDIC insurance because that’s where the scam comes in.
Banks have insurance because they need it. When you buy that $100K CD, the bank may get to loan it out as many as ten different times. If they even make 5% on a loan then at 10X they are making $50,000 per year on your money and giving you $4000. That’s why banks are the most profitable business in the world. They make money on every other business and even on every penny we save. After this, I don’t take anyone seriously who complains about a 2% commission on a MYGA or that an insurance company takes a small spread before delivering the guaranteed rate. Banks and investment institutions make far more off of your money than anyone in the insurance industry.
Again, the benefit of CDs is easy accessibility and decent rates for a short period of time. It’s fine for short-term goals but not long term planning. When you switch to MYGAs you will always get a better rate, actual compounding if you take a longer term, and even tax deferral. MYGAs have all the advantages but there is a little more work to it. In my opinion you shouldn’t mess with an annuity for anything less than a three year term. If you are afraid of the commitment then use a CD while you educate yourself enough to engage in more detailed planning. Hit the calendar link if you want to talk more about your goals.
Have a great weekend…
Bryan
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Last Updated on October 8, 2025 by Bryan Anderson
