Why you should open a long-term CD for your children now
Although toys and games may be at the top of your shopping list this holiday season, as a parent, you could be looking for a useful gift or two. And, if so, have you considered a certificate of deposit (CD)? These unique deposit accounts offer impressive returns in exchange for you agreeing to lock your money up for a predetermined period.
When you open a long-term CD for yourself, you're making an investment. When you open one for your children, though, you're also setting the stage for a valuable financial lesson, one that could help your children build a strong financial foundation for their families later in life.
Open a long-term CD for your children today!
Why you should open a long-term CD for your children now
Opening a long-term CD for your children isn't only valuable in terms of dollars and cents. These accounts also have great educational value that could help your children by offering them a few lessons in saving. Some of the most important of these lessons include:
Disciplined saving
CDs are centered around a simple agreement. The account holder agrees to keep their money in the account for its entire term and the financial institution agrees to pay a return on the investment. In most cases, you'll pay a penalty if you tap into your CD early.
On the other hand, most children like to spend money as soon as they get it. So, when you give your child a long-term CD, they'll learn that even though they have money in the bank, it's not always wise to touch it, and it won't hurt them to hold onto the money for a while.
Teach your children how to save effectively with a long-term CD now.
The value of saving and investing money
Thanks to the Federal Reserve's federal funds rate hikes over the past couple of years, many CDs offer impressive APYs. So, if you open a CD for your children, they'll watch as meaningful growth occurs in their account. Once they see this growth for themselves, your children may be more likely to build a emergency savings and start investing earlier in their adult lives.
The power of time
CDs also offer an example of the power of time and compounding returns. For example, let's say you open a $500 3-year CD with a 5% APY as a holiday gift for your child. You can teach your child that a 5% return on a $500 investment is $25 — which is what the CD would earn in the first year. But in years two and three, gains would compound for larger returns. In the end, you could show your child that instead of a $75 return after three years, they earned $78.81. That's an additional $3.81 in compound interest.
You could use this opportunity to show what compound gains do over a relatively short time with a relatively small amount of money. This example may make it easier for your children to understand why it's important to start investing young and make regular contributions to their investment accounts over time.
Why it may be a good time for long-term CDs in general
In addition to the fact that long-term CDs give you a way to teach your children important financial lessons, this is also a good time to open one. Here's why:
- Interest rates are high: The Federal Reserve has increased its federal funds rate target 11 times in the last couple of years. That has driven rates on many CDs to highs that are hard to ignore.
- Locked in rates: "Long-term CDs are also a valuable tool for individuals looking to lock in a favorable interest rate in anticipation of potential rate decreases," says Cameron Burskey, senior partner at Cornerstone Financial Services. And, many recent economic signals point to possible rate reductions in 2024. So, opening a long-term CD now locks in today's high rates for as long as the account's term lasts.
- Safety: Long-term CDs offer predictable returns that aren't affected by market or economic conditions. Moreover, as deposit accounts, they're typically FDIC or NCUA insured for up to $250,000. "Overall, long-term CDs are a reliable and low-risk option for those who prioritize safety and steady, guaranteed returns in their financial strategy," says Burskey.
Lock in today's high returns for your children with a long-term CD now.
The bottom line
A long-term CD can be a valuable gift for your children in several ways. Not only will a long-term CD come with a face value, but it comes with an educational value. Moreover, with potential interest rate declines ahead, now may be the perfect time to open one of these deposit accounts.
