"What are the Disadvantages of Savings Certificates"

Certificates of deposit have major disadvantages:

1. Lack of liquidity

If you want to get your money back, you must go through a lot of rigamarole and stern lectures and looks from the bank's employees.

Plus, you must pay the agreed upon CD withdrawal penalty.

Years ago I had to do this. And when all was said and done, the "penalty" was that the rate of interest my money earned me since the last interest payable date was reduced to the rate the bank paid on its interest rates.

What a paper tiger, I thought. All the vaunted penalty amounted to was that I received the same rate of interest as though I'd had the money in a savings account. Big deal.

However, your mileage may vary. Before you take out a savings certificate, see what the early withdrawal penalty is.

However, you can get similar yields on your money by simply using money market funds. And they're so liquid, you can even write checks.

2. If you invest in a callable certificate of deposit and CD interest rates go down after a year or more, you will not continue to benefit from being paid the high amount of interest of the certificate of deposit.

The bank will call the savings certificate away from you and you must reinvest your money at the lower rates then prevailing in the marketplace.

3. If you have six figure savings to invest, you must split your money up and take out certificates of deposit in different banks -- or lose the safety provided by FDIC insurance.

The Federal Deposit Insurance Corporation "insures" savings certificates up to $100,000 per person per financial institution.

So if you want to take out $500,000 in certificates of deposit, you must go to five different banks -- in addition to the one holding your checking account!

Obviously, this is a hassle.

3. The biggest disadvantage to certificates of deposits is that the interest you receive will not keep up with inflation.

The certificate of deposit interest paid to you will have a lower purchasing power as time goes back. The principal will have a lower purchasing power as time goes by.

Next: How can income investors use certificates of deposit / savings certificates

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