Savings Rates Are Dropping — But This CFP Doesn’t Recommend This Type of CD [CNET]

September 30, 2024 Robin Hartill

A long-term CD guarantees interest years from now, but there’s a catch.

Robin Hartill is a Florida-based Certified Financial Planner and a longtime financial editor and writer. Her work regularly appears on The Motley Fool, Yahoo! Finance and Nerdwallet. Previously, she wrote the syndicated Dear Penny personal finance advice column. She is a graduate of the University of Florida.

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Dashia is a staff editor for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.

Last year, when CDs reached record highs, one certified financial planner didn’t buy into the hype. Instead, Anna N’Jie-Konte, CEO of Poder Wealth Advisors and CNET Money expert told CNET Money she was steering clients away from certificates of deposit.

Anna N'Jie-Konte, CFP, CEO of Poder Wealth Advisors and CNET Money expert — Anna N’Jie-Konte, CFP, CEO of Poder Wealth Advisors and CNET Money expert review board member

“When we get to a point where we have multiple Fed meetings where they’re pausing rate hikes or they’re signaling that they’re going to cut rates, then I think you can start to think about a CD,” N’Jie-Konte told CNET in September of last year.

Now that the Federal Reserve has made its first rate cut, N’Jie-Konte is more open to CDs if they fit with your savings goals — but only in certain scenarios.

There’s one type of CD she’s not on board with though, and she thinks most people should avoid it, if possible. Here’s why.

Should you lock in a high CD APY right now?

According to N’Jie-Konte, whether you should open a CD now depends on the term.

N’Jie-Konte believes that short-term and intermediate CDs (six-month to two-year terms), make more sense now than they did a year ago — particularly for money you don’t need right away. For example, you may stash your down payment for a home 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 may want to tap even sooner, like six months from now.

N’Jie Konte still isn’t a fan of most long-term CDs; in this case, anything over a two-year term. She likes that with a CD, you get a guaranteed interest rate for a specified window of time. The drawback is that you’ll pay an early withdrawal fee if you need to tap that money early.

“My recommendation is always that I never want folks to go past 18 months of CDs,” N’Jie-Konte said. That’s because you’re locking money up for a long period with the hope, not guarantee, that you won’t need it. If you do, you could lose out on a considerable amount of interest. If rates go up, you’ll also miss out on better APYs if your money is tied up in long-term CDs.

Where you should stash your long-term savings

Long-term CDs are often popular if you’re nearing retirement, particularly if you’re worried 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 to steer away from CDs and instead consider a money market mutual fund or treasury bills to earn more yield.

For those with a decade or more until retirement, N’Jie-Konte stresses the importance of retirement accounts.

“I usually tell folks in that instance to make sure they’re doing as much as they can to max out tax-advantaged accounts,” N’Jie-Konte said.

Employer-sponsored retirement plans, like 401(k)s, individual retirement accounts and health savings accounts are a few options. If you have children, you can also look at investment accounts designed for education, like 529 plans. Taxable brokerage accounts can also be a valuable tool since they offer the flexibility to withdraw money at any time without penalty.

“Brokerage accounts are something that people really underutilize, particularly young folks, because they really are the thing that buys you the most freedom and flexibility when it comes to your life trajectory,” she said. You can grow your money at a higher rate compared with CDs or money markets, and it’s still easily accessible, she added. The trade-off is that these accounts are riskier than CDs.

What to know before opening a CD

Even though N’Jie-Konte isn’t a fan of long-term CDs, one still may fit into your financial plan. If you want to earn a guaranteed return with little risk, now’s a good time to open an account to maximize your savings while rates are still high.

Before you do, make sure you have a fully stocked emergency fund that’s easily accessible, preferably in a high-yield savings account. Also, make sure you feel comfortable locking up your savings for a set period. If you withdraw money from your CD before the term ends, you’ll pay an early withdrawal penalty that will eat away your interest earnings. Just in case you need the money sooner, review the bank’s early withdrawal policy and fees. If you’re on the fence, a no-penalty CD can be another way to set aside money for a guaranteed return but rates typically aren’t as high.