Is a traditional savings account or a Certificate of Deposit (CD) a better option for a long-term savings account for my young child?
I want to start a long-term savings account for my child. Is a traditional savings account or a Certificate of Deposit a better option? I do not plan on making any withdrawals and will be contributing about $200 per month.
Neither option pays any kind of return that you could notice without a magnifying glass. Both pay interest at less than the inflation rate. Don't hide your money in a zero-return vehicle like a CD or bank account. Invest it instead.
If you are saving for college, put the money into a 529 plan. The returns aren't that great but they are better than a CD and income is not taxed. (You say "young child" so I will assume that there is 15 years until he/she goes to college.) At $200 a month you might be able to accumulate enough for one year of college after 15 years, but that's certainly better than nothing. Get started. As time goes by and you have more spare cash, increase the monthly deposit. You'll be glad you did.
If you have objectives other than tuition you can invest in a prudent mix of good-quality equities. These will fluctuate in value but after 15 years you should expect a pretty nice annualized return. Since you are starting small, an index fund would accomplish this. (Look at the equal-weight S&P 500, for example.) Good luck.
This is a great question and I think you should do a bit more research. I do not think either of those options are ideal based upon the goals and parameters you outline.
I would explore setting up an invetement account for your child. I would take a look at either a custodial or 529 Plan account (if you want these funds available for them to use for college/higher education). Being that your child is young, you want to save long term and will be contributing on a regular basis, I would certainly look into investing the funds in a vehicle and investment that will put you in a position to get a higher return over the long term. Certainly, many of the investments you would look at will have a higher risk associated with them than a CD or savings account, but over the long term and using dollar coast averaging (putting money in on a regular basis) should put you in a position to obtain better returns.
I would certainly suggest you consult with a fiduciary advisor, but do not wait. The sooner you get started the better, it is not about timing the market, but time in the market. Good luck!
You mention it being a "long-term" savings account or CD. If by long-term you mean 10+ years or somewhere around there, you should consider investing the funds. While a CD and savings account has no market risk, they do have inflation risk. Over time that money has to be able to grow with the pace of or faster than inflation or it's not able to purchase the same goods and services that it's able to today. In effect, you're losing money.
Plus, with a longer time horizon until the money needs to be accessed, your child can afford to weather the ups and down's of the market. Over long periods of time, the "risk" of investing in the stock market is reduced. Automating contributions every month will take advantage of the dips in the market and "dollar-cost-average". Meaning over time, you're purchasing more shares when prices are low, and fewer shares when prices are high.
Depending on how you envision this money being used, whether it's for educational purposes or to be used at the child's discretion, you may consider a specific type of account. A 529 will allow for tax-free growth for education expenses.
I mean short answer is if you are looking for growth and these are longer term dollars AND you are willing to take on calculated risk then no. If it were me and I would be putting those funds in some type of investment to help have the potential to yield better return. A CD is a great option if you literally want no market risk, however you certainly have liquidity risk and inflation risk by doing so. If investing it I would suggest finding the right balance of risk/reward that you are comfortable with. I would also clearly define the long term timing and goal of these assets then allocate them accordingly.
For a young child with a time horizon of many decades, you would be far better advised to begin with a pair of broad-based equity mutual funds (U.S. and international) or exchange-traded funds and contribute regularly. Given a period of years, it is most likely that this approach will provide a multiple of the level of returns that would offered by a traditional saviings account or CD. Neither would be a good idea.