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Why Young Adults Should Use Certificates of Deposit for Investing

As young adults in their 20s and 30s are finding their stride in their careers and earning enough money to save, making smart financial decisions now can give them greater control over their future. Many young adults are unsure how to begin investing and growing their savings. A certificate of deposit is a smart and relatively safe way to begin.

Young couple in their kitchen looking at a laptop

If your traditional savings account is growing and you’d like that money to be working harder for you, it will help to understand why people in their 20s and 30s should use CDs.

What Is a Certificate of Deposit?

A certificate of deposit, or CD, is a type of savings account in which you deposit a lump sum and leave it untouched for a prearranged amount of time. The bank or credit union pays interest over that time. Your exact interest rate may depend on the size of your balance and how long you agree to let the account mature. When you open a CD with an accredited bank or credit union, your savings is fully insured up to $250,000 per depositor by the FDIC (Federal Deposit Insurance Corporation).
Maturity options for certificates of deposit can run from three months to five years. If you need to withdraw funds before the maturity date, you may be charged a fee, so it’s best to purchase a CD with funds you won’t need to access within the established timeframe.

Why Should People in Their 20s and 30s Use CDs?

A certificate of deposit is a safe investment option because — unlike investing in the stock market — the bank or credit union assures you a certain interest rate. Therefore, you can count on a return on your investment. If you have a specific long-term goal, like putting a down payment on a house or taking a big vacation, a CD allows you a “set it and forget it” option to grow your existing savings.
As a young adult, you can invest in a certificate of deposit once and put the accrued interest toward your goal, or you can continue to invest the profits from a CD into longer terms and grow your savings over time. Taking out several CDs with different maturity terms allows you to continually decide whether to take out your funds or renew the terms of your CD and let that money continue to grow.
Investors use the term “laddering” to describe this process of opening several certificates of deposit that reach maturity at different times. As each maturity date comes up, you can decide how much of your funds you need to support your lifestyle and how much you can keep in your CD to continue earning interest. Since CDs with longer terms generally earn the most interest, this strategy gives you the opportunity to save for the future and gain access to your funds on a regular basis.
You or your investment manager can also open certificates of deposit within your personal retirement savings. If you have an IRA or a Roth IRA, you can grow that account by purchasing CDs and earning the interest. These retirement CDs are a great way to make your savings work harder for you from the beginning, possibly helping you retire earlier than you otherwise may have. Optimizing your retirement strategy earlier is one important reason why people in their 20s and 30s should use CDs.
As you’re starting to build the lifestyle you want, opening a certificate of deposit — or several certificates of deposit — can help you reach your goals quicker. And at First National Bank and Trust Company, we’d be happy to help you. You can get started with this form or give us a call at one of our local branches in Southern Wisconsin and Northern Illinois.