3 Surprising Ways Opening a CD Might Backfire on You

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You may be tempted to lock in a CD before rates fall even more. But read on to see why you may end up regretting that decision. [[{“value”:”

CDs have been a popular investment in recent years for one big reason — rates have been sky-high. Even though it’s gotten harder to find 5% CDs following the Federal Reserve’s September interest rate cut, many CDs are still paying close to 5%.

But even though today’s CD rates remain impressive, you could run into trouble by opening one. Here are a few reasons opening a CD might backfire on you.

1. You might lose out on an investment opportunity

The idea of earning almost 5% on your money sounds nice, right? But you should know that the S&P 500’s average annual return over the past 50 years is 10%. And that accounts for periods when the index did well and periods when it didn’t.

If you have money you don’t expect to need for a good seven years or more, then investing it is probably a smarter move than opening a CD. You might snag a much higher return with a stock portfolio.

Say you have $10,000 to work with. Even if CDs somehow pay 4.5% a year over the next 20 years, which is highly unlikely, you’re looking at about $24,000 as your end result. With a stock portfolio paying you 10%, in 20 years, you’re looking at more like $67,000.

That’s a $43,000 difference. And it’s based on a long-term CD rate that’s probably not realistic. You’re likely going to lose out on more than $43,000 in this example if you choose CDs over a broad market index like the S&P 500.

If you’re new to investing, click here for a list of the best online brokerage accounts. That way, you can start growing your money ASAP.

2. You might choose the wrong term and get penalized for an early withdrawal

Most banks offer a variety of CD terms. Some offer a term as short as three months, and many offer a term as long as 60 months.

But choosing the wrong CD term puts you at risk of an early withdrawal penalty. And while the amount of that penalty is up to your bank, it could cost you a lot of money.

Say you open a 12-month CD thinking you’re OK to part with your money for that long. But what if you realize you need to repair your air conditioner next summer, when you still have three months before your CD matures? If you pull out the money, you risk a big penalty, making your CD less useful.

3. You may have to put off purchases that make your life better

Taking an early CD withdrawal penalty is annoying and costly, so you may be inclined to do whatever you can to avoid that. But even if you can leave your CD alone until it matures, doing so could negatively impact your quality of life.

Say you open a 12-month CD, and a few months later, your TV breaks. You could technically wait until your CD matures to take your money and buy a new one, since it’s possible to go without television for a while. But is that something you want to do? Probably not.

Similarly, you may be on a month-to-month lease. If a great apartment across town becomes available, you may want to jump on it. But if you can’t afford the cost of a move because your money is tied up in a CD, you could miss out on that opportunity.

Proceed with caution

None of this is to say that opening a CD right now is a mistake. But it’s important to be aware of the pitfalls you might face if you decide to put money into one.

So before you do, consider whether it pays to invest your money instead. And think carefully about your near-term expenses and wants.

If you’re not ready to invest your money, it could make sense to keep it in a savings account rather than commit to a CD. Savings accounts aren’t paying so much less than CDs right now.

And while your interest rate in a savings account isn’t guaranteed like CD rates are, you at least get the flexibility to withdraw your cash at any time without worrying about a penalty. Click here for our list of the top savings accounts and rates today.

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