3 Signs You’re About to Open the Wrong CD

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If you didn’t shop around and compare rates, you could open the wrong CD. Find out about this and other signs you’re about to make an investing error. [[{“value”:”

So you’ve picked a CD and you’re ready to invest your money. But are you really ready to pull the trigger? You don’t want to make the wrong investment choice, and it’s easy to make mistakes that leave you regretting your decisions.

To make sure this doesn’t happen to you, watch out for these three red flags that the CD you’re about to open is the wrong one.

1. You didn’t shop around

There’s a ton of variation in CD rates. If you check out The Ascent’s picks for the best 12-month CDs, you’ll see yields ranging from 4.50% to 5.25% right now. With such a wide range even on a single list, it’s clear that if you don’t shop around, you could leave money on the table.

That’s particularly true when you consider that the FDIC reports that the national average rate of a 12-month CD is just 1.80%. If you bought a CD paying the national average rate, your yield would be 3.45% below what you should be earning if you’d just opted for the bank willing to pay you 5.25% instead.

Dig into many different CD offers to see what rate is best and don’t forget to check out credit unions and online banks, as they tend to have the most competitive offers.

2. You didn’t make sure you could keep your money locked up

CDs have different terms. Term lengths typically range from three months to five years, although there are some 1-month CDs out there and some terms longer than five years as well. Whatever the time until your CD matures, you’ll want to be sure you’re OK with your money staying invested for that entire period. Otherwise, you might have to pull your money out and pay an early withdrawal penalty.

If you’re looking at buying a 5-year CD, but you haven’t confirmed that you definitely won’t need the money for the next half-decade, you could end up having to take the funds out early and potentially losing some of your initial investment if you haven’t yet earned enough interest to cover the fees.

Look carefully at the money you have available (as well as your goals for the money you’re investing) to be sure you’re making the best choice.

3. You’re stretching to afford the minimum balance

Finally, you are most likely making a bad decision to open a CD if you are struggling to afford the minimum amount you’re required to deposit.

Some CDs have minimum deposit requirements and you won’t be eligible to buy them unless you can come up with that minimum, be it $500 or $2,500 or whatever limit the bank sets. If a CD is offering good terms, you may be tempted to struggle to afford it — or even to take out money that should be in a savings account with the assumption you’ll put it back after the CD term is up.

The problem is, you can’t predict the future or know when life is going to throw you curveballs. If you chose a CD with a minimum investment requirement that wasn’t really comfortable for you, that just increases the chances you’ll have to pull that money out early if everything doesn’t go perfectly.

You don’t want to open the wrong CD, so try to avoid making these three errors. Take the time to research all your options to find a CD that’s really a great fit. You don’t want to regret the investment choices you’ve made.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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