This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
CDs are a smart bet when you want to earn more interest. But read on to see why you shouldn’t put every dollar you have into a CD. [[{“value”:”
Image source: The Motley Fool/Upsplash
When CD rates started to climb last year, I was pretty quick to throw more money into CDs to capitalize. Maybe you did the same.
And these days, you can still earn 5% (and sometimes more) on a CD, which is a pretty sweet deal considering you’re guaranteed that return without risking the loss of principal like you would in a stock portfolio. So if you didn’t open a CD last year when rates started rising, you may be inclined to do so soon.
But while a CD may seem tempting right about now, you don’t want to put all of your money into CDs. Doing so could put you in a seriously bad spot in the event of an emergency expense. And it could also mean stunting your savings’ growth over time.
Don’t get stuck paying a penalty
The upside of putting money into a CD is snagging a guaranteed interest rate on your deposit — and that interest rate is usually higher than what you’ll get with a regular savings account. But in exchange for that higher and guaranteed interest rate, you’re being forced to commit to keeping your money in the bank for a certain period of time.
If you end up having to withdraw your CD ahead of its maturity date, you risk a penalty, the exact amount of which will hinge on your bank. At Capital One, you’re looking at a penalty of three months of interest for an early withdrawal on a CD of 12 months or less. So if you have a 12-month, $5,000 CD you withdraw early, your penalty will be $62.50.
It’s kind of silly to subject yourself to a penalty like that if it’s avoidable. So instead of putting all of your money into CDs, leave a portion in a regular savings account. And have that portion be enough to cover three months of essential bills. That gives you decent protection and could make a CD withdrawal penalty less likely.
Don’t sell yourself short on returns
A CD can be a really good bet in terms of saving for a near-term goal. But you should not keep all of your savings in a CD. If you tie up your retirement funds completely in CDs, you might limit the extent to which you can grow a nest egg.
Over the past 50 years, the stock market has averaged a 10% annual return. Even if CDs continue to pay 5% like they do now, that’s a much lower rate of return over a lengthy period of time.
To illustrate what a difference you might be looking at, let’s say you put $10,000 into CDs that pay you 5% annually over 30 years. In three decades, you’re looking at about $43,200.
With a 10% return over 30 years, you’re looking at more like $174,500, which is more than four times as much as your ending balance with a series of CDs. So while it’s okay to put some of your money into a CD, clearly, putting all of it into CDs for the long haul could prove disastrous for your retirement.
All told, it’s a good time to open a CD, and there’s nothing wrong with capitalizing on today’s strong rates while they’re available. But at this point, hopefully it’s pretty clear why keeping all of your money in CDs is a seriously poor choice.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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.
“}]] Read More
