3 Lies You’ve Been Told About CDs

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CDs could be a great place for your money. But it’s important to know the truth about how they work. [[{“value”:”

There’s a reason so many people are clamoring to open CDs these days. CD rates are sitting at some of their highest levels in years. And while that could change once the Federal Reserve starts to implement interest rate cuts, which may happen this year, for now, CDs are looking pretty attractive.

But if you’re going to put money into a CD, it’s important to know what you’re signing up for. And that means getting to the bottom of these mistruths you may have heard.

1. Your money is automatically safe

The nice thing about putting money into a CD is that your principal is safe, whereas with a stock portfolio, you run the risk of losing money. But this assumes that your bank is FDIC-insured. If that’s not the case, you risk taking losses in the event of a bank failure.

Your bank’s website should list whether it’s FDIC-insured or not. And if you really want to make sure, look it up on BankFind Suite.

Also, remember that FDIC insurance only protects a deposit of up to $250,000 per bank, per person. Granted, that’s not an issue for most of us, but it’s worth noting nonetheless.

2. You get a no-risk, guaranteed return

When you invest in stocks or put money into a savings account, your return is not guaranteed. With a CD, it is. That could really be instrumental to your financial planning.

But CDs carry hidden risks with regard to the returns they offer. First, if you withdraw a CD early and are hit with a penalty, you’ll lose out on some of your return (and perhaps some of your principal if you haven’t earned enough interest to make up the penalty). So while your return is guaranteed in theory, that may not happen in practice.

Secondly, your CD’s rate may be guaranteed, but that doesn’t mean it’s a good one over a lengthy period. The stock market’s average annual return over the past 50 years has been 10%. Even today’s outstanding CD rates pale in comparison.

If you were to put $5,000 into a CD with a 5% return over 30 years, you’d end up growing your deposit into about $21,600. But let’s apply a 10% return instead. That could turn your $5,000 into about $87,250 over a 30-year period. So with a stock portfolio, you’re looking at a gain of over $82,000, as opposed to a gain of just $16,600 with CDs.

3. It’s best to have all of your CDs at the same bank

You’ll often hear that it’s best to keep all of your CDs at a single bank so you can more easily keep tabs on them. Remember, it’s important to know when your various CDs are maturing so you can decide what to do with your money at that time. If you open CDs at different banks, you risk forgetting about them.

But opening a CD at another bank could mean getting a better rate. So rather than limiting yourself to using a single bank, come up with a system of tracking and managing your CDs. That could be achieved via a simple spreadsheet and a series of calendar reminders alerting you to your CDs’ various maturity dates.

CDs could be a great tool to use in the course of meeting your financial goals. But don’t buy into these lies, because they have the potential to hurt you in a really big way.

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