As a millennial navigating the complexities of personal finance, Duncan Taylor always sought ways to balance risk and reward. Growing up in a world marked by economic uncertainty, he learned to be cautious with his money. Enter the Certificate of Deposit (CD)—a seemingly old-school investment tool that’s been finding new relevance among younger generations.
In his early 20s, Duncan had been focusing on more popular investment strategies like index funds, inspired by the likes of Jack Bogle, the founder of Vanguard, and Warren Buffett. Both financial giants advocate for low-cost, long-term investment in broad markets like the S&P 500. Their philosophy guided his early investment decisions, helping him to avoid emotional trading and the pitfalls of trying to time the market.
The Appeal of CDs
As Duncan started thinking more about financial stability and future planning, he realized the importance of diversifying his investment strategy. His long-term investments were doing well, but he began considering his short-term needs. He wanted a safe place to park his money, earn a stable return, and avoid market volatility. That’s where CDs and CD Valet came into play.
When it first launched in November 2022, Duncan began perusing CD Valet, an online marketplace for consumers to connect with financial institutions to compare and shop for the best CD rates nationwide. Not long after, he checked rates weekly to get a general sense of where CD rates were headed.
“I saw a 5.8% APY and was like, ‘Wow, that’s an unreal rate, especially for 18 months. And money like that is a solid deal,” he said. “I had a couple of low-yield CDs that I cashed in to max the lump that I could drop in that CD.”
Duncan added that CDs offer several advantages that align well with his financial goals:
- Safety and Security: Most banks and credit unions offer FDIC and NCUA insurance on deposit accounts up to $250,000 per depositor based on the ownership of the account – in this instance, a certificate of deposit.
- Fixed Returns: The interest rate on a CD is locked in, providing a predictable return.
- Inflation Hedge: While CDs might not offer the high returns of stocks, they can keep pace with inflation, preserving purchasing power.
Why CDs Over Other Short-Term Investments?
Duncan chose CDs over other short-term investments like high-yield savings or money market accounts because they offer several benefits. The bond market can be volatile, especially in unusual rate environments. CDs offer a fixed rate which makes them a stable alternative with predictable returns. Plus, with a CD, there’s no need for active management. Once you lock in a rate, you can set it and forget it, knowing your money is safe and growing.
Building a CD Ladder
One strategy he found particularly effective is creating a CD ladder. This involves purchasing multiple CDs with different maturity dates. For example, instead of putting money into a single five-year CD, funds can be split across a one-year, two-year, three-year, four-year, and five-year CD. This strategy allows savers to have access to a portion of their money each year, providing liquidity while still earning a good return.
Building a CD ladder also serves as a self-insurance mechanism. It ensures savers like Duncan have funds maturing regularly to cover unexpected expenses without having to break a CD early and incur penalties. This approach provided immense peace of mind during a challenging period when his wife underwent cancer treatment. Knowing they had accessible funds without sacrificing earnings was a financial lifesaver.
The Future of CDs in Duncan’s Portfolio
“CDs are the cornerstone of a stable portfolio,” added Duncan. “That smooths out some of the lumpiness and eases the highs and lows a little bit so that it’s more consistent and predictable.”
His strategy will likely shift towards a more traditional CD ladder once the yield curve normalizes, balancing between short-term accessibility and long-term stability.
Certificates of deposit may seem like a relic from a bygone era, but for millennials looking for a safe, stable, and predictable investment, they offer compelling benefits. Whether you’re saving for a short-term goal or building an emergency fund, CDs can play a crucial role in a diversified financial strategy.
FAQs
How can a CD ladder benefit millennials in their financial planning?
A CD ladder allows millennials to diversify their investments across different maturity dates, providing liquidity while still earning competitive returns.
What advantages do CDs offer compared to other short-term investments?
CDs provide fixed interest rates and security against market fluctuations, making them a more stable choice compared to high-yield savings accounts or money market funds.
Are CDs a good option for emergency savings for millennials?
Yes, CDs can be a smart choice for emergency savings, especially when structured in a ladder, allowing access to funds while still earning interest.
