Here’s Why You Should Never Keep All of Your Money in CDs

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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”:”

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.

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