Rich Girl Roundup: Should I Put My Money in CDs?

Katie: Welcome back, Rich Humans. It's the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and every Monday, Henah and I are gonna unpack an interesting money question that often comes from our audience. A quick message from our sponsors.

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Katie: Before we get into it today, this week’s upcoming main episode on Wednesday is about pet insurance. Is it a scam? Is it worthwhile? How do you adequately measure the risk/reward ratio here and make decisions accordingly? All right, onto the Roundup.

Henah: Yes. So today's question is from a new listener, Jessica S. Welcome to Rich Girl Nation, Jessica, we're happy to have you here. And their question was, “Given the current rate, would you advise someone in their late twenties with no debt and significant savings account to put some cash in a CD? I have some money in a brokerage account, but I feel more comfortable with the idea of a CD.” So to start, Katie, what the heck is a CD besides certificate of deposit? Because I don't know anything besides that. 

Katie: Yeah, so I'm gonna go off the cuff here. A certificate of deposit, or a CD, is effectively this financial instrument where you give your money to a bank, you lock it up for a set period of time. Typically it's six months or 12 months, or even 18 months, five years. I mean, there's different periods on these devices, but you get a set rate of return that is typically higher than what you can get in a savings account. The trade-off is that you can't touch the money while it's locked up, but you know what that money is going to get for you in the form of a yield.

So they are a favorite of retirees. My grandma, shout out Grandma Jean, I don't think you listen to this show, but if you did, hey, and she loves her CDs. She does CD ladders. So she is not really invested in the stock market. She basically just has all of her cash in CDs that are maturing at various timelines, and then she's cashing out and using it. So a ladder is basically when you have multiple CDs that are maturing at different times. So you might have one that comes due at 12 months and another one that comes due at 18, and another one that comes due…so you kind of always have a CD maturing at a set interval. And then you have this, I'll say, guaranteed cash flow, so to speak. Obviously that's really only possible if you are getting a yield on that CD that is enough to support whatever your withdrawal rate is, which, historically in the last 20 years has not been super easy. But that could be changing now that we're seeing five plus percent. 

Henah: I guess another analogy of a ladder would be like a revolving door. So it's just staggered. 

Katie: Yeah, that's another good one. We're queens of analogies over here. 

Henah: We are. 

Katie: So I think the very first thing that I'm keyed in on here in this question is the fact that Jessica is young. She's in her twenties. So immediately I'm like, ooh, okay. Not striking me as a great candidate for a CD for a long-term strategy. But we will unpack that. 

Henah: Yeah. This is where I'm gonna jump in and remind everybody that Katie is not a financial advisor. 

Katie: Correct. This is not financial advice. Please do your own research. 

Henah: Yes. 

Katie: Now that my ass is significantly covered… 

Henah: We've done a CYA. So tell me, okay, why would someone in their late twenties not be the right fit? I'm pretty sure I know what you're gonna say, but just to lay it out. 

Katie: I'll say there's two things in her question that are making me think she's not a good candidate. A, in her twenties, so time horizon. B, she has mentioned that she already has significant savings, which tells me she has a strong existing cash cushion. Now, I think the timeline of when you're gonna need this money is very important. So if she's saving this money for short- or medium-term goals, think five years or fewer, I would say yeah, CD, definitely a better bet than a brokerage account. If I'm a betting woman, you can get 4% to 5% in CDs right now. You can also get 5% in some high-yield savings accounts that don't require you to lock it up. So I would just toss that out here.

But the way that I think about it is that CDs are for preserving wealth. They're not for growing it, especially in the long term. 5%—that's a great rate. Nothing to sneeze at, but it's still a negative real return if inflation is 8%, right? 

Henah: Got it. Now what would someone do if they're thinking, okay, I wanna buy a house in two years. Do you think then a CD would make more sense? 

Katie: Absolutely. CD, high-yield savings account, if you already have the down payment mostly together and ready, then trying to preserve that with a CD I think makes sense. If you're actively contributing to it, you're probably better off in a high-yield savings account because once the money's locked up in the CD, it's kind of a one and done thing. I mean, I suppose you could open more than one, but that's not really efficient in my mind. I used to keep an emergency fund in a CD, which also is not optimal, but at the time, that was the only place that I could get a yield that wasn't just totally embarrassing. So that would be my main thought on something like a house or another big purchase. 

But if we're talking long term, our Rich Girl Roundup last Monday was about the importance of buying and holding over time, not stopping those contributions when the market is down. It kind of comes back to, if anyone remembers our I bonds episode from 2022, my bear case for I bonds, which is that you have these young people who have 30- or 40-year investing timelines ahead of them who are experiencing a crashing bear market. And rather than buying more shares when they're cheap, they're seeking safety for their long-term investment dollars in vehicles like I bonds and CDs. And it just doesn't really further your long-term goals, even if it feels safer in the moment. 

Henah: It's almost like money psychology is really important. So I guess I have a few tactical questions about a CD. So is there a max that you can put into it? 

Katie: That's a good question. There's not really a limit in the traditional sense. It's not the way that, say a 401(k) was only gonna let you put in $22,500 per year, but you still are subject to that FDIC insurance limit. So theoretically you wouldn't want to have more than $250,000 in one CD at one institution or with that institution total because above that limit, you are theoretically no longer covered by FDIC insurance. So if you had a million dollars and you wanted to spread them out across four CDs at four different banks, you could do that. I also think theoretically you could put it all in one, but then you're risking the insurance limit. Though I should continue to reiterate, not an expert on this financial vehicle, it's just kind of my off-the-cuff research that tells me these things. 

Henah: Yeah, and I will say I think we've seen recently why having FDIC insured money is really valuable. 

Katie: Except not really, 'cause the government's gonna bail you out anyway. And that's on that. 

Henah: Okay, I was gonna try, but also I was gonna say if you have a million dollars that you're just trying to put somewhere to keep it, you can call me. I'll keep it safe for you. 

Katie: Henah will keep it for you. 

Henah: I have a good save rate—Katie will tell you. 

Katie: She's a good steward. 

Henah: Yes. Because we've talked about this in the show; my husband and I are actively saving for a house. We know that it may not happen for another year because we're moving. So maybe this is something we could explore, and then say we decided we wanted to go for it. Where would we look for a CD? Do I just go online? And when I'm done, like when the time limit of 12 months, 18 months, five years, whatever it is, when it's up, how do I get my money and returns back?

Katie: So really any bank, I think most brokerage firms have them too, if I'm not mistaken. I saw a screenshot a few weeks ago where Vanguard was offering a CD that had a 5% yield. I don't know enough about this specific product to be able to say, oh, you definitely wanna go to XYZ credit union. Or hey, there's this one obscure bank in Minnesota that has like, I don't know at that level, but a bank or brokerage is the simple answer. And then when it comes to how you get your money back, basically when the CD, when that time period is over and it reaches maturity, then you will have access to the money you put in and the interest that you earned.

Henah: Got it. 

Katie: And you can either then re-up and put all of it in another CD and then that will earn interest, or you could withdraw it and do something else with it. 

Henah: Cool. Okay. I think that makes sense. Is there anything else you wanted to mention about CDs or cassette tapes before we hop off? 

Katie: I'm not gonna take the bait on the joke. 

Henah: Darn. 

Katie: I'm gonna close us out here. No, that is all for this week's Rich Girl Roundup. We will see you on Wednesday to chat about pet insurance versus self-insuring, and which one is probably gonna come out on top.