My Friend Opened a 1-Year CD and Regrets It. Here’s Why

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It’s important to be careful when opening a CD. Read on to see what could go wrong. [[{“value”:”

CD rates have been strong for quite some time now. And a lot of savers have been trying to take advantage of them.

Last year, my friend opted to open a 1-year CD to snag a great rate herself. And her CD is pretty close to coming due. But while my friend made some nice money in interest, she regrets her decision to open a CD for one big reason.

When your CD is a source of stress

My friend was convinced she could afford to part with the money she put in her CD. And she made sure to keep a pile of cash in her savings account.

But about halfway through her CD’s one-year term, her car, which happens to be older, started giving her trouble. And while she was able to raid her emergency fund to cover an initial repair, a second one popped up a few months later that she no longer had the money on hand to cover.

At that point, she had a choice — cash out her CD early and take a penalty, or find another way to come up with the money. She opted for the latter. But it wasn’t easy.

My friend wound up charging her car repair on a credit card and working a side hustle to pay off the bill quickly. Because she hustled, she didn’t rack up much interest, and the penalty for cashing out her CD early would’ve been higher than the small amount she paid her credit card company. But all told, it was a stressful situation.

And the worst part was that she had the money. It was sitting right there in her CD. She just couldn’t touch it because she didn’t want to get penalized.

Lesson learned

My friend sorely regrets putting as much money as she did into a CD. Once it comes due, which is happening soon, she plans to roll only about one-third of that sum into a new CD. She plans to keep the remaining money in a regular savings account so it’s there for her when issues with her car arise again (or, more likely, a new car, since she’s only willing to sink so much money into her current one).

If you’re thinking of opening a CD, make absolutely sure you can afford to part with the amount of money you’re locking away. You could also try to find a CD that doesn’t charge a penalty for early withdrawals, but those can be hard to find.

Another thing you can do is ladder your CDs so you have money freeing up at different times during the year. Finally, familiarize yourself with your CD’s early withdrawal penalty rules. For example, at Barclays, you’ll face a penalty of 90 days’ worth of interest for withdrawing a CD early with a term of 24 months or less.

But banks are allowed to determine their penalties independently — there’s no universal standard. While you might hope to never be in a position where you’re looking at a penalty, things happen. It’s important to know what you’re getting into.

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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.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.

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