What's the Point of Jumbo CDs?

A brief answer for a short interview about certificates of deposit

CreditDonkey asked me, “What factors should investors consider when choosing a jumbo CD term length?”

This was my answer:

A jumbo CD has a high minimum balance requirement, typically around $100,000. So, first of all, you won’t consider using a jumbo CD unless you have a large amount of money that you need to keep in a relatively safe investment, where you’re comfortable sacrificing the higher returns you’d get from the stock market or the housing market over the long run.

The question is, how long do you need this “safer” place to park your money? Usually, you have a timeframe in mind because you’re saving for a specific purpose. For example, if you want to buy a house in six months, you may not want to take the risk of leaving your money in the stock market, where it could drop in value significantly on any given day, but you still want it to keep growing. Then, a six-month jumbo CD may be right for you. If your target date is sooner or later (say, sending your child to college in a year or two), then your term will be shorter or longer accordingly.

We go into this stuff in a lot more detail in my Personal Money Management class at Cal Poly Pomona. Understanding how to think through risk-return tradeoffs and investment time horizons is essential for anyone trying to manage their money in concert with their life goals, but sadly that level of financial literacy is absent in most Americans’ education.

At Cal Poly, we’re trying to extend this type of financial education far beyond the finance curriculum. Let us know if you have any ideas to get this message out to the millions of American households who could benefit from it.