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CDs have their benefits. But read to see why opening a CD also carries some risk. [[{“value”:”
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A lot of people I know are opening CDs these days. And I can see why.
Today’s CD rates are the highest they’ve been in years. And look, why wouldn’t you jump at the opportunity to earn an APY of 5.00% or so on your money without taking on the risk that comes with investing your cash?
But while CDs certainly have their benefits, there are drawbacks to consider, too. Here’s the downside of putting money into CDs.
You risk losing out on a better rate
July 2024 is a great time to open a CD because rates are at a high. And because we know that the Federal Reserve is likely to start cutting interest rates in the coming months, it’s unlikely that you’ll find a much better rate on a CD later in the year than today.
But during periods when interest rates are fluctuating and have the potential to rise, CDs can be risky. That’s because you might lock in a CD just before a better rate becomes available. From there, you’re sort of stuck.
Sure, you could always cash out your CD early to free up your money so you can open a CD at a better rate. But then you risk an early withdrawal penalty.
Of course, one way to potentially get around that issue is to choose a bump-up CD, which could give you the option to score a higher interest rate during that CD’s term. However, since bump-up CDs give you that flexibility, they tend to start you off with a lower interest rate than what a regular CD might offer. So there’s a tradeoff you’ll need to consider.
You risk falling short of your long-term financial goals
A CD could be a good place to park your cash for a limited period of time. But all told, I don’t recommend putting money into CDs for the purpose of saving for far-off goals, like retirement.
The reason? CD rates may be impressive today, but the 5.00% APY you can snag right now isn’t the norm. I remember a time not so long ago when you could barely get 2.00% on a CD.
By contrast, the stock market’s average annual return over the past 50 years has been 10%. To be successful as a stock investor, you should plan on holding your stocks for a good amount of time — ideally, a decade or longer. But when you’re talking about saving for a long-term goal, that’s doable.
To illustrate the drawback of using CDs to save for long-term milestones, let’s say you’re able to score a 3% return in a CD over the next 30 years. With $10,000, at 3%, you’re looking at about $24,300 in three decades from now. If you put that $10,000 into the stock market and score a 9% return — just below the market’s average — you’re looking at about $132,700. That’s a difference of $108,400.
Know what you’re signing up for
There can be big benefits to opening a CD — especially at a time like this. But make sure you’re also aware of the downside of putting money into CDs, so you don’t wind up regretting your decision.
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