Money Rehab with Nicole Lapin - ABC on CDs

Episode Date: August 31, 2021

I know what you’re thinking: CDs? I haven’t had to think about CDs since the first gen iPod came out. But, no, Nicole is not talking about those CDs; today, she’s talking about Certificates of Deposit. Listen up to find out if they’re a good fit for you! Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. I am pumped to dig into today's listener question because it deals with two really

important topics that we haven't gotten to cover yet in our 100 plus episodes of the best podcast in all the land. That is this one, of course. Today, we're talking about CDs and mutual funds, and I'll let today's money rehabber take it away. Hey, Nicole, I have a CD right now. It's about 3.5% APY, and it's about to expire. And unfortunately, that rate is no longer available. And I am really considering rolling that money into a mutual fund. What are your thoughts on mutual funds? The mutual fund that I am considering is with my credit union. There's a $5,000 minimum and a 5% fee every time I make a deposit. So for my very first deposit I

would lose $250. The return rate is supposed to be really good. The average return rate for this particular mutual fund is about 10 to 18% for the first year. So I just wanted to know, what are your thoughts? Do you think it's worth me rolling my money into a mutual fund? Or do you think I should just set up another CD? Before we dig into an answer, let's give a little background to those listeners who haven't had to think about CDs since the first generation iPod came out. So no, we're not talking about those CDs. We're talking about certificates of deposit. Certificates of deposit are investment vehicles where you lock up your money for a certain period of time. Maybe it's three months, six months, nine, 12 months, or

years, even up to 10 years. You pinky swear that you won't touch the money at all. And in exchange, you get a slightly better rate than other savings vehicles when you go to take it out. And the longer you leave your money in a CD, the more interest you get. Now, if you break that pinky promise or if you take the money out earlier than the maturity date, you'll face a penalty. Many CDs will charge a penalty of six months interest if you take the money out earlier than the maturity date, you'll face a penalty. Many CDs will charge a penalty of six months interest if you take your money out early. So while these are great ways to make some extra money, you need to be able to handle an emergency without solely relying on those funds. There are liquid or no penalty CDs out there that will not penalize you

for early withdrawal, but they also come with a lower rate of return. While CDs are typically considered pretty straightforward investments, there are three interesting flavors to consider. Number one, market-linked CDs. This type of CD tracks the market, so you don't have a fixed rate of return. If the market goes up, you could make more than you would with a conventional CD. But if the market goes down, you won't. Market-linked CDs have longer terms. Think years instead of months. And even higher penalties if you take the money out early. Meaning that once you stash your cash in there, it's going to be tied up for a while. They are also taxed at higher rates than regular

CDs. Plus, you have to declare interest each year of the term, not at maturity. So you may be paying tax before you even take money out of them. Still, if you want some market exposure without the risk of losing your initial investment, market-linked CDs might be a good option for you. Number two, market-linked CDs might be a good option for you. Number two, brokered CDs. These are offered by some broker middleman or middlewoman who buys CDs in bulk for sweet rates and then sells them to institutions and individual investors. These can be bought or sold on a secondary market before their maturity date, but the rules are much more complicated. So if you want to go this route, definitely discuss it with your financial advisor first. Number three, jumbo CDs. These require at least $100,000 as an initial deposit, but offer a much higher rate of return. Dream big,

folks. One word of caution, Some CDs go into auto renewal mode, automatically signing you up for another CD when the first term is over. Luckily, you already know the best way to avoid that pitfall. Of course, set up a calendar reminder for the day before your CD term ends to withdraw your money or re-up the term on your terms. How do I feel about CDs generally? Well, just like I wouldn't put 100% of your emergency fund in a high-yield savings account, I wouldn't put all of it in a CD either. But they are a good option for keeping your principal safe while giving you some additional bang for your buck. Now let's talk about the other option our money rehabber is considering,

mutual funds. A mutual fund is kind of what it sounds like. It's a company that pulls money in from investors and then invests it in a hodgepodge of things like stocks and bonds and so on. There's a lot of hype around mutual funds right now, but like today's money rehabber mentioned, there are fees. Boy, oh boy, there are fees. fees. Boy, oh boy, there are fees. Mutual fund fees are a special breed of fees, folks. They are higher than most other investment vehicles. Now, it would be one thing if mutual funds were the best investment on the planet. Maybe then I wouldn't need to specifically shame them, or maybe, just maybe, then their fees would be worth it. But unfortunately, they are not. And far from it.

Nearly all, 96% of actively managed mutual funds don't beat the market. That's right. These are the ones that are rated on Morningstar, the most popular service for evaluating mutual funds. On Morningstar, you can read all about the track record of the dude, sadly, it's mostly dudes, who act as the puppeteer of the fund, picking what's in it. They spend a lot of time researching the perfect smorgasbord of offerings. But it's all a lot of hot air once you dig into the data. Today's listener is looking into a mutual fund that made promises of very

high returns. Now, I would take an extra close look at how they are crunching those numbers. 10 to 18 percent, that's a lot. So don't shy away from asking a ton of questions about what that actually means. Asking for clarification doesn't mean you're helpless. In fact, it's the lifeline that will protect you from finance bros who don't have your best interest at heart. But I do. If you do all the research, though, and you decide to go with a mutual fund, I'd make sure you're taking into account taxes. Every quarter, mutual funds pay dividends that are taxed at the end of the year. Since mutual funds are designed to

set it up and forget it, my suggestion is to keep these long-term dividend-paying investments growing inside tax-deferred accounts like a 401k, an IRA, a defined benefit plan, an annuity, and so on, so that you're letting them compound in a tax-free environment or a future tax-free environment in the case of Roths to minimize the blow. For today's tip, you can take straight to the bank. Once your CD has matured, diversify that money. Re-up on a new CD. And that's your safe investment. But then play around with something that has a little higher risk and reward, like index funds. Now, I know you mentioned there is a $250 fee. That's an initial fee, which is a really steep fee still. I would just make sure that is the only fee you're

going to incur. My guess is that it's not. I don't want to completely knock mutual funds. If you're choosing between a mutual fund and putting your money under a mattress, I would go with the mutual fund every day and twice on Sunday. But if you're choosing between a mutual fund and another kind of sophisticated investment, I would take a super close look at the types of fees that are involved in both. They might look really small right now, but the more money you put in, that is much more money in both. They might look really small right now, but the more money you put in, that is much more money in fees. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from

Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.