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You might kick yourself for opening a CD in a few different scenarios. Keep reading to learn how you can avoid CD regrets. [[{“value”:”
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It’s really tempting to invest in certificates of deposit (CDs) right now. CDs are really low-risk investments because they’re FDIC-insured. That means up to $250,000 of your cash is protected in the event of bank failure. CDs are also offering great rates, with many providing yields above 5.00%.
But while there are some big benefits to buying CDs, they aren’t the right investment for everyone. Here are two reasons why you might end up regretting your CD investments.
1. You need to take your money out sooner than planned
The biggest reason you could regret buying a CD is because you find yourself needing to take out your money before the CD matures.
You have a ton of options for CD terms. The most commonly available CDs come with three-month to five-year terms, but there are many different term lengths to choose from. Some banks even offer 1-month CDs. What they all have in common, though, is that you must commit to leaving your money invested for the duration of the term.
If it turns out you can’t keep your funds invested, there are consequences. You’ll likely get hit with a penalty equal to a certain number of days of interest. This could range from seven days of simple interest to 365 days of simple interest, depending on the terms and conditions of your CD.
If you get stuck paying this penalty, you could be left with huge regrets since you’ll lose some of your gains. You could even potentially lose some of your principal if you have to take money from the CD before you’ve earned enough to cover the penalty. To avoid this, be sure you don’t commit to buying a CD unless you’re 100% confident you’ll be able to leave the money alone for the duration.
2. You miss out on better returns
You might also regret opening a CD if you invest money that really should be in the stock market and you miss out on the returns you could have earned.
See, the stock market is typically going to provide a better return on investment than a CD will, at least over the long term. You can invest in an S&P 500 index fund and pretty consistently expect to earn a 10% average annual return over a period of several years or longer. That’s much better than the return you’ll get from any CD.
The only reason not to open a brokerage account and put your money into the market to get these better rates is because there’s a risk of loss. This risk goes up if you have a short investing timeline. You don’t want to buy stock shares at a bad time, have to sell to get your money out, and not be able to wait for the market to recover. You could lose a lot of money if you have bad market timing and don’t have at least a few years to wait for a recovery.
If you have money you’ll be able to leave alone for a few years, though, then you should put it into the market instead of a CD to get those higher rates. Otherwise, you could end up regretting limiting your ROI and missing out on potential gains.
Fortunately, you can avoid these two big regrets by thinking carefully about your options to grow your money. If you will need that cash on an undetermined timeline (say, for unplanned expenses), or won’t need it for a while (say, you need it for retirement), a CD simply is not the right place for it to be.
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