Banks love to advertise CDs (certificates of deposit). But when you’re in your twenties and early thirties, CDs don’t make a lot of sense.

Photo by CarbonNYC.

Certificates of Deposit

Certificates of deposit are like savings accounts. They are federally insured, meaning they can’t lose value, so they are a totally safe place to put cash.

Unlike savings accounts and money markets, however, when you “buy” a CD, you can’t access that money again for a set period of time without penalties, be it six months, a year, five years, etc.

In exchange for leaving your money put, the bank pays you a slightly higher interest rate than you can usually get with a savings account.

Why Don’t CDs Work for Twenty-Somethings?

The rules of personal finance in your twenties dictate that any available money to be saved or invested needs to go to paying off credit card debt, saving for retirement, and building an emergency fund. No ands, ors, ifs, or buts.

If you have credit card debt that isn’t on a 0% teaser rate, that’s where every penny goes. Period. High interest debts paid down? Great. Next you need to be maxing out your retirement accounts – your 401(k), up to $15,500 annually, and your IRA up to $5,000 annually.

To avoid any confusion: yes, sometimes you’ll see CDs as an investment option in retirement plans. If you’re under 30 – putting any money in these is a big no-no! You’re young with plenty of years to invest, so you can tolerate risky equity investments. In fact, you should be craving them. CDs are available to retirement investors who are nearing or already in retirement and who need to try to earn some kind of return on their money without risking it.

Finally, you want to be saving between two and six month’s living expenses, in cash, as an emergency fund. Since it’s an emergency fund, you need this money to be liquid – available within a day or two should you lose your job, get sick, or have your wallet stolen in Thailand. You can see how having your money tied up in a CD for another four months could be a drag.

Plus, with online high-yield savings accounts providing great rates these days, CDs don’t even offer marked improvements in your rates.

The Exceptions

Every rule has exceptions, especially in personal finance, and the no-CDs-under-30 rule is no different.

If you have no credit card debt, you have maxed out your $20,500 annual retirement contributions, and have you at least two months cash in an emergency fund, you might consider a CD.

If you have been saving for a home or a car and know you will not be buying for a set period of time, throw your savings into a CD for that period of time to get a better return that with an online savings account. (Just remember, don’t touch your emergency cash).

Finally, if you have the minimum two months of emergency cash and are working on building more, you can do what is called bracketing.

Say you are putting $400 a month into emergency savings. Once you have, say, three months living expenses saved, you can begin to buy CDs with different maturity dates. The goal is to think about what would happen if you needed your emergency savings in the future, and to have different CDs mature each month after your initial cash reserves has run out.

CD bracketing is a more advanced personal finance topic that I’ll get into later. But for now, just remember, if you’re under 30, chances are you don’t need a certificate of deposit.

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