The Biggest Downside of CDs Could Actually Be a Huge Benefit in Some Situations. Here’s Why

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

CDs require you to stay invested to avoid penalties, which means giving up liquidity for your money. Read on to learn why that can be a good thing. [[{“value”:”

When you consider opening a certificate of deposit (CD) and you’re evaluating the pros and cons, one big disadvantage is the fact you give up liquidity in the process. Basically, that means you can’t just take your money out whenever you want. You must agree to leave it invested until the CD matures — which could be months or years depending on the CD term you choose.

Obviously, agreeing to leave your money locked up and not being able to take it out when you want it isn’t ideal. It means giving up flexibility. But while this is one big reason why some people opt to keep their money in a savings account rather than CDs, there are times when it can actually be a huge benefit. Here’s why.

CD penalties could help you make the right choices

There’s a simple reason why the lack of liquidity can sometimes be a big benefit of putting money into CDs: The fact that you’ll be penalized if you withdraw your money earlier could serve as a really strong incentive to actually leave your money invested for the time you have planned.

When you keep your money in a savings account and can take it out any time, it can be tempting to do that if you have expenses you want or need to cover. If your car goes on the fritz and you don’t have the cash to pay for repairs, or if a really great deal on an amazing vacation comes up, you might be inclined to just pull money out of savings and say you’ll put it back later.

There’s no real consequence to doing that — other than you end up using money that you had earmarked for savings. And that may not be enough of a deterrent to stop you.

When you know you’ll face a financial penalty if you withdraw your cash early, though, that’s a different story. Instead of pulling that money out of a CD and paying a big fee that could equal as much as 90 or 180 days of simple interest, odds are good you’ll look into other solutions. This could mean waiting to buy the items if you can, or maybe even picking up some overtime or a side gig to earn the money rather than taking the financial hit of breaking your CD’s term early.

Take advantage of the extra motivation that a CD penalty can offer

Obviously, you don’t want to put money in CDs if you know there’s a good chance you’ll have to take it out. That’s why your emergency fund doesn’t belong in a certificate of deposit. It doesn’t make sense to set yourself up to have to pay a penalty.

But if you have money you want to save for something you won’t need until at least three months in the future, you should seriously consider investing it in a CD. By doing so, you create some added protection against impulsive decisions that could lead you to fall short of your goal. The other benefits CDs offer, like a higher rate than you’ll find on most savings accounts, are an added bonus on top of the fact that the penalty will help you find the willpower to stay the course.

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