Certificates of deposit (CDs) are hot right now. CDs let you lock in an interest rate, and the Federal Reserve has bumped its benchmark rate to historic highs, impacting consumer interest rates in the process. Some CDs offer APYs as high as 5.00%. Putting money in a CD is a simple way to earn good interest for anywhere from a few months to five years or longer. For some, it’s an easy call.
However, I’m telling my Gen Z friends to skip CDs and invest their money elsewhere.
Debt, especially debt stemming from higher education, is the hallmark of my generation, as are low savings balances. According to the latest Federal Survey of Consumer Finances, the median bank account balance of Americans under 35 is $5,400, and the median educational debt balance is $18,000! For my friends with debt, their goal is to remain financially stable long enough to pay off debt.
CDs are fine for diversifying investments and locking in great rates. But Gen Z has other priorities. Here are three reasons why I’m telling my 20-something friends, some of whom are still in college, to skip CDs in favor of more flexible and profitable places to put their money.
1. Unstable lifestyles
My friends and I know one thing for sure: We don’t know where we’ll be living a year from now. It’s a fact of life. We’re swapping between apartments to stay near college campuses and staying with family members for rental discounts. It’s messy, but it works.
The thing about CDs is they lock up money, typically for a few months to five years. They’re profitable but inflexible. When next year’s rent is a mystery, you want flexibility. CDs ain’t that. You can withdraw money from CDs early, but you’ll be on the hook for early withdrawal fees. Fees that eat into profits and defeat the purpose of investing in CDs to begin with.
Savings accounts better suit many Gen Z lifestyles. I’d rather my friends put money into high-yield savings accounts they can withdraw from penalty free, than into a CD that penalizes you for bad timing. Sure, my friends’ interest rates might drop, but at least they won’t be strapped for cash because they accidentally stuck rent money in a certificate of deposit.
2. Low balances
My Gen Z friends and I spend time studying or crawling up the career ladder. For the most part, we’re not raking in cash. Our checking account balances? Low. Our savings account balances? Lower. What money we have, we tend to put toward college expenses or paying down debt.
That leaves us vulnerable to financial shocks like unexpected layoffs or medical bills.
We’re young, but we know life hits you when you least expect it — it could be a bad time to have a big chunk of your savings locked up in a CD. A high-yield savings account is the more forgiving option. A savings account we call an emergency fund gives us the padding we need to survive big bills.
For those of us with cash to invest, putting money in a CD comes at a high opportunity cost.
3. Long investment horizons
Some of my Gen Z friends have low or zero debt. Others want to save money for the long term while simultaneously paying down their debt. To my friends who can stomach it, I’d typically suggest putting money not in a CD, but rather, in the stock market.
The stock market offers high returns over long time horizons. Since its inception, the S&P 500 has compounded about 7.4% percent annually on average. That’s a couple of percentage points better than what the best CDs offer.
Thing is, you’re more likely to earn big returns over long stretches. In that regard, my Gen Z friends have the advantage. In your 20s, you can often afford to let your money ride out the stock market’s crazy swings for 40 years or more.
Combined with investing best practices like diversifying and holding a comfortable emergency fund, investing in the stock market is a solid way to grow long-term savings.
CDs sacrifice flexibility for better rates
CDs can be great. If you’re saving up for a short-term purchase and want to earn a bit extra than you would from a savings account, a CD may be right for you. Uncertain? Feel free to freshen up on the difference between savings accounts and CDs. There’s more than one way to pad a bank balance — low or otherwise.
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