By Gabrielle Olya
How Certificates of Deposit Can Benefit Gen Z and Millennials
Depending on their circumstances and goals, putting money into a CD account may be a good choice for younger generations. Here’s a look at some of the benefits.
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They’re a Stable Investment
“When investors of all ages are up against economic uncertainty like we are now, CDs can provide some much-needed stability,” said Shyam Pradheep, general manager of Zogo, a financial literacy platform. “This is especially true for younger investors who are looking to minimize their risk as they develop and navigate their investment strategies.
“CDs are considered one of the lowest-risk investment options out there, and they offer comparatively high returns,” he continued. “It’s a win-win if you’re able to meet the minimum deposit requirements and can invest your deposit for the CD’s entire term.”
You Know Exactly How Much You Will Get
Unlike with many other types of investments, you can know in advance how much you will earn when you put money into a CD.
“One of the greatest benefits of CDs is that their returns are easy to calculate and rely on, so you can determine how much you’ll actually earn over time before you invest,” Pradheep said. “If those earnings match your investing goals and you won’t need to withdraw the funds until maturity, CDs can be a great option.”
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CDs Are Ideal for Short-Term Financial Goals
“Conventional wisdom tells us that age is a deciding factor in how to grow your money — yet actually, the purpose of the money supersedes that advice,” said Kathleen Malone, senior financial advisor with Wells Fargo Advisors. “If the purpose is to grow investments for say, purchasing a home in two to three years, then you’d want to steer clear of the stock market and look into CDs.”
The Downsides of CDs
A CD account won’t be the best fit for every Gen Zer or millennial. One downside is that they often require a large deposit to open, which may create a barrier to entry for some members of these generations.
“The highest returns usually go to the investors who are able to deposit large sums of money for long periods of time,” Pradheep said. “This is a common barrier Gen Z and millennials face with any fixed-term investment. Especially during times of economic uncertainty, younger investors may not have the initial deposits needed to take advantage of the highest interest rates.”
Another downside is that you can’t easily access the funds if you end up needing them before the account matures.
“If you put money into a three-year CD and use it before that timeframe, you would have to pay an early interest penalty fee when you cash out,” Malone said.
Finally, while CDs are a safe investment, there are other investment vehicles that could potentially offer higher returns, especially over the long term.
“If a Gen Zer or millennial aims to grow money for retirement, then investing in the stock market is going to be a good option for that purpose,” Malone said.
However, she advises against discounting CDs altogether.
“I imagine that so few Gen Zers and millennials keep money in a CD account [due to] a desire for higher returns from a brokerage money market account, for example,” Malone said. “The return could be higher, but the rates fluctuate and you don’t get the guaranteed rate as you would with a CD account. Those new to investing would be wise to think about how the market was down last year, and it’s not as easy as it looks [to earn high returns from the market] compared to the three previous years.”
