3 Potential Regrets When Opening CDs (and How to Avoid Them)

Some CDs have interest rates above 5% right now, making them an excellent choice for people looking to grow their money in a relatively safe way.

But as with nearly any financial decision, some people have regrets after opening a CD account. Here are three potential regrets CD owners experience, and how to avoid them.

Regret No. 1: Not having access to your money

CDs pay you a specific yield in exchange for holding your money for a set period. When you open a CD, you choose how much money to put into it and how long you want to leave it there.

For example, the shortest time you can have money in a CD is usually around three to six months — although occasionally you will run across a bank offering shorter terms. Many other CDs may last longer, including 1-year, 3-year, and 5-year CDs. Because your money is locked up for this period, it’s less liquid than keeping it in a checking or savings account.

How to avoid this regret: It’s important to avoid putting money into a CD you may need for emergencies. You should only put money into a CD after you’ve built your emergency fund and have extra money left over. Ideally, you should have three to six months’ worth of expenses in a savings account, but aim for at least $1,000 for emergency expenses. Once you have that amount in a savings account, you can consider opening a CD.

Additionally, you may want to consider CD laddering. With CD ladders, you put money into several CDs that reach maturity at different times. This ensures you have access to some of your money as the shorter CD terms mature. You can then choose to reinvest that money in another CD, or take it out and use it (or invest it some other way).

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Regret No. 2: Not getting the yield you want

With many CDs currently paying an annual APY of 5%, this regret may not be as prevalent as it once was. But some people who signed up for CDs many years ago when rates were lower may regret not having the higher rates available today.

That might mean some people with their money in CDs weren’t able to earn enough to have their money keep up with the rate of inflation over the past few years.

Additionally, putting money in a CD means that you often opt for a lower rate of return than you might have gotten if you put that same amount into the stock market. For example, the historic annual rate of return for the S&P 500 is around 10%. There’s no guarantee you’ll earn that rate in any given year, but the stock market always has the potential for higher returns than CDs.

How to avoid this regret: There’s nothing much you can do right now about a CD you signed up for years ago that pays a lower interest rate than today. But if you’re considering a CD right now, make sure to balance that investment with your stock market investments, and do your research before opening a CD to ensure you find one with as high an APY as possible for the term you’re looking for.

U.S. Bank recommends keeping 2% to 10% of your entire portfolio in cash and cash equivalents (which include CDs). This allocation suggestion keeps you from putting too much money into CDs (or holding too much cash) and allows a larger percentage of your investment portfolio to earn a higher return in the stock market.

Regret No. 3: Paying an early withdrawal penalty

Another regret some people have with CDs is that they have to pay a penalty to withdraw their money early. This regret goes hand in hand with the first regret of not having access to your money, but it deserves its own section because the penalties can be significant.

For example, Wells Fargo says that if your CD term is between one and two years, you can be charged up to six months’ worth of interest for an early withdrawal. If the CD term is longer than two years, the penalty is up to 12 months’ worth of interest. Ouch.

Generally, the longer the CD term, the higher the penalty fee you’ll pay for early withdrawal, and every bank and credit union sets its own penalties.

How to avoid this regret: The best way to avoid early withdrawal penalties is to, of course, leave your money in the CD. You should ensure you don’t need the money going into a CD for any reason during the term, including emergencies. To avoid withdrawing money early from your CD, keep enough money in a savings account to handle unexpected expenses.

CDs can be an excellent option for earning interest on your money, but they aren’t as liquid as savings accounts and have more restrictions. Be sure to read the fine print before opening a CD, and only put money into it if you are ready to part with it for the duration of the CD’s term.

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