Check out Part 1 for my recommendations on where to save your money!

Last week, I covered recommendations for where to save money, but there are plenty of places where people save money that aren’t so great.  I’ll try to make quick work of them:

CDs
CDs, or “Certificates of Deposit” have been offered by banks for decades, and they have offered a guaranteed percentage rate of interest for your agreement to keep a certain amount of money in the bank for a specified term.  CDs are offered in terms anywhere from 6 months to 60 months, and individuals are heavily penalized on their interest if they withdraw the money before the specified term is up.

The reason these aren’t good investments is that your money is illiquid or inaccessible to you during the term, and they offer very little upside on the interest.  Current rates on a CD are hovering about 1-1.25%, depending on the term.

Savings Bonds
Savings Bonds are issued by the United States Treasury, and have generally been considered the most safe and stable savings vehicles because they are backed by the U.S. Government.  But that doesn’t matter much now, as both the FDIC and NCUA (both federal institutions) insure deposits in banks and credit unions, respectively, up to $250,000 per person.

Savings bonds come in a variety of types, and many of you may have received paper savings bonds as a gift, likely Series EE bonds, from your grandparents.  My mom recently found some that I was given by my Grandfather when I was young.  They come in a few different types, and Series I bonds are the only ones that offer any interest above a VERY weak rate on EE bonds.  Even so, you have to leave them alone for 5 years to get that return, in which you’d be better off investing.

While I appreciate my grandfather putting that $250 or whatever it was into a savings bond for me, $250 in a good mutual fund would have turned into more by the time it was over.  For example, if (I were a grandfather right now, lol) I put $250 in a mutual fund for 20 years for my grandchild, and it earns, on average 10%/year, we end up with over $2,500!  Not bad.  If I purchased a $250 EE bond right now, though, in 20 years it would reach its maturity amount of [drumroll please!] …  $500.  Umm… no thanks.  Do not do savings bonds; there’s just no point.

Life Insurance
People get sold on complicated, high-cost life insurance plans, because they think they can get additional value from them.  These types of plans come in many, many forms: Whole Life, Cash Value, Variable Life, Universal Life, Return of Premium, Vanishing Premium, etc. etc.

The allure of these plans is that they “invest” a portion of the premiums you pay into solid mutual funds, and build up an account for you inside the policy.  We refer to that as the “cash value” of the policy.  Sounds great, right?

The problem is that once the investment actually reaches your account, it’s been hit with so many fees and commissions, that the actual return ends up really around 2-4%… maybe a little better.   (Not to mention that when you die, the insurance company keeps “your” account.)  9.99 times out of 10, you’re far better off purchasing the equivalent life insurance coverage in a simple term life policy for much cheaper, and investing the difference yourself.  Use insurance for insurance purposes, and invest in real investments.

Question: I certainly haven’t covered them all… What are some other bad places to save money?