This is why this CFP does not recommend long-term CDs
Last year, CDs reached record highs, with some terms earning interest rates of more than 6%. Although it seemed like a good opportunity to earn interest, Anna N’Jie-Konte, CEO of Poder Wealth Advisors and member of the CNET Money Expert Review Board, said she was steering clients away from certificates of deposit.
Anna N’Jie-Konte, CEO of Poder Wealth Advisors and board member of CNET Money Expert Review.
“If we get to a point where we have multiple Fed meetings where they pause rate hikes or indicate they’re going to cut rates, then I think you might start thinking about a CD,” N’Jie says. -Konte told CNET last September.
Now that the Federal Reserve has made its first interest rate cut, N’Jie-Konte is allowing money to be put into a CD – but only in certain scenarios. Yet there is one type of CD that she does not agree with. This is what she advises now.
Should You Lock High CD-APY Now?
According to N’Jie-Konte, it now depends on the period whether you have to open a CD.
N’Jie-Konte believes that short- and medium-term CDs (with a term of six months to two years) make more sense now than they did a year ago, especially when it comes to money you don’t need right away. For example, you can save your down payment for a house in a CD so you can earn guaranteed interest if you don’t plan to start shopping until next year. She also sees value in opening short-term CDs for money you might want to withdraw even sooner, such as six months from now.
N’Jie Konte is still not a fan of most long-running CDs; in this case all over a period of two years. She likes the fact that with a CD you get a guaranteed interest rate for a certain period. The downside is that you’ll pay early withdrawal fees if you need to tap that money early.
“My recommendation is always that I never want people to go past 18 months of CDs,” N’Jie-Konte said. That’s because you’re tying up money for a long period of time with the hope and not the guarantee, that you won’t need it. If you do, you could miss out on a significant amount of interest. If rates rise, you’ll also miss out on better APYs if your money is tied up in long-term CDs.
Where to keep your long-term savings
Long-term CDs are often popular as you approach retirement, especially if you’re concerned about your investment strategy or stock market volatility.
If you’re looking for a place to stash money for at least three years, N’ Jie-Kone says you should avoid CDs and instead consider a money market fund or government bonds to earn better returns.
For those waiting a decade or more until retirement, N’Jie-Konte emphasizes the importance of retirement accounts.
“Normally I tell people that in that case they should do as much as possible to get the most out of tax benefits,” says N’Jie-Konte.
Employer-sponsored retirement plans such as 401(k)s, individual retirement accounts and health savings accounts are some options. If you have children, you can also look into investment accounts designed for education, such as 529 plans. Taxable investment accounts can also be a valuable tool because they provide the flexibility to withdraw money at any time without penalty.
“Brokerage accounts are something that people really under-utilize, especially young people, because they’re really the thing that gives you the most freedom and flexibility when it comes to your life trajectory,” she said. You can grow your money faster compared to CDs or money markets, and it’s still easily accessible, she added. The trade-off is that these accounts are riskier than CDs.
What you need to know before opening a CD
Even though N’Jie-Konte isn’t a fan of long-term CDs, one can still fit into your financial plan. If you want to earn guaranteed returns with little risk, now is a good time to open an account to maximize your savings while interest rates are still high.
Before you do this, make sure you have a fully stocked emergency fund that is easily accessible, preferably in a high-yield savings account. Also, make sure you feel comfortable keeping your savings for a period of time. If you withdraw money from your CD before its term expires, you’ll pay an early withdrawal penalty that eats away at your interest income. In case you need the money sooner, check the bank’s early withdrawal policy and fees. If you’re on the fence, a no-penalty CD can be another way to put money aside for a guaranteed return, but the rates aren’t typically as high.
