What Does Dave Ramsey Say About Certificates of Deposit?

Dave Ramsey is a financial expert known for his straightforward approach to personal finance. His advice centers on practical steps to achieve financial freedom and build wealth. This article explores his perspective on Certificates of Deposit (CDs) and how they fit into his financial philosophy.

Understanding Dave Ramsey’s Core Financial Philosophy

Dave Ramsey’s financial teachings guide individuals from debt to wealth accumulation. A foundational element is becoming debt-free through the “debt snowball” method. This involves paying off debts from smallest to largest to build momentum, and he suggests pausing investments during this phase to accelerate debt payoff.

After achieving debt freedom, the focus shifts to establishing an emergency fund. This fund starts with $1,000 and expands to cover three to six months of essential living expenses. Its purpose is to act as a financial safety net, providing a liquid buffer against unexpected events, rather than serving as an investment vehicle.

For long-term wealth building, Ramsey advocates for growth-oriented investments, primarily diversified mutual funds. He recommends investing 15% of household income into four categories of mutual funds: growth, growth and income, aggressive growth, and international. This approach prioritizes capital appreciation over preservation, aiming for substantial returns to outpace inflation and build lasting wealth.

Dave Ramsey’s Specific Stance on Certificates of Deposit (CDs)

Dave Ramsey disfavors Certificates of Deposit (CDs) as a primary tool for wealth building. He refers to CDs as “glorified savings accounts” that offer “slightly higher interest rates” compared to traditional savings options. This characterization underscores his view that they do not generate sufficient returns to be considered effective long-term investments.

A reason for his stance is the low interest rates offered by CDs, which struggle to keep pace with inflation. When inflation rises, the purchasing power of money held in low-yield CDs can erode over time, meaning the money grows slower than the cost of living. This makes them an unsuitable choice for someone focused on significant wealth accumulation over decades.

CDs present an opportunity cost; money locked into a CD could otherwise be invested in higher-growth vehicles like mutual funds. Ramsey’s investment strategy is geared towards maximizing growth, and CDs are designed for capital preservation rather than aggressive appreciation. While CDs offer federal insurance up to $250,000, their limited growth potential makes them less appealing for his investment philosophy.

Another drawback is the liquidity constraint of CDs. Funds are committed for a fixed term, ranging from a few months to several years. Early withdrawals incur penalties, which can significantly reduce or even eliminate any earned interest. This lack of immediate access makes CDs impractical for an emergency fund.

Contextualizing CDs Within the Ramsey Framework

Within Dave Ramsey’s financial framework, Certificates of Deposit play a very limited role. They are not appropriate for the wealth-building phases, specifically Baby Steps 4 through 7, which are dedicated to investing for retirement, college, paying off the home, and building significant wealth. These later steps require investments with higher growth potential than CDs offer.

For an emergency fund, Ramsey advises against using CDs. He recommends keeping emergency savings in highly liquid accounts, like standard savings accounts or money market accounts. The primary goal of an emergency fund is safety and accessibility, not maximizing returns.

While some financial planners suggest CDs for specific, short-term savings goals where capital preservation is paramount and the funds are not needed for a defined period, this is not a common recommendation within the Ramsey approach. His emphasis is on immediately liquid emergency funds and growth-oriented long-term investments, making CDs largely incompatible with his strategies.