3 Signs Your Money Doesn’t Belong in a CD


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The Federal Reserve spent much of 2022 and 2023 raising interest rates in an attempt to slow the pace of inflation. And while that unfortunately drove the cost of borrowing upward for people needing loans and carrying credit card balances, it did a lot of good for people with money in the bank.

In fact, these days, CD rates are sitting at competitive levels. And they’re likely to stay that way until the Fed starts cutting interest rates.

We don’t know exactly when that will happen, and the Fed has said it plans to cut rates at some point this year. But as of now, you still have an opportunity to lock in an attractive rate on a CD. However, if these signs apply to you, then opening a CD probably is not a good bet.

1. You might need your money very soon

It’s an important thing to have money in the bank at all times in case unexpected expenses arise. If you have cash set aside for emergencies, then that money should not go into a CD. Rather, it should sit in a regular (preferably high-yield) savings account.

The reason? There can be penalties for cashing out a CD before it matures. The extent of those will depend on your bank and the CD term you’re looking at. But there’s no reason to risk penalties by putting cash you have earmarked for sudden bills into a CD.

2. You’re saving for a far-off goal

Although CD rates are high right now, today’s rates aren’t the norm. And even if they were the norm, they still pale in comparison to the stock market’s historical returns. As such, if you’re saving for a far-off goal, like retirement or your kids’ college, you should invest your money in stocks rather than limit yourself to the lower return you’ll get with CDs.

Right now, many CDs are paying somewhere in the vicinity of 4.50% to 5.00% APY. While these rates are notably high, let’s still assume that you have $10,000 and are able to get 5.00% APY on your money with a CD over the next 25 years. If so, you’ll grow that $10,000 to about $34,000.

However, over the past 50 years, the stock market’s average annual return has been 10%, accounting for both good years and bad. If you invest your $10,000 and get a 10% return on your money over the next 25 years, your balance could end up at roughly $108,000. For this reason, as a general rule, if you’re saving for an event or milestone that’s more than five years away, investing is usually a better bet than keeping your money in the bank.

3. You haven’t read the disclosures

Any time you enter into any sort of financial agreement, it’s important to know what you’re signing up for. The same holds true for CDs. So you shouldn’t put your money into a CD without reading the disclosures — information your bank is required to provide regarding your CD’s terms and rules.

For example, your bank is required to tell you what financial penalty you’re looking at for cashing out your CD before it matures. That’s important information to have, so if you’re not willing to read through it, you’re better off keeping your money in a regular savings account.

Opening a CD could be a great way to snag a higher return on your money. But if these signs apply to you, then putting money into a CD may not be your best move.

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