2 Reasons You Could Regret Buying a CD
![](https://wmal.net/wp-content/uploads/2024/03/2-Reasons-You-Could-Regret-Buying-a-CD-780x470.jpg)
[ad_1]
Buying a certificate of deposit (CD) can be a good investment in the right circumstances. When you buy a CD from an FDIC-insured bank, up to $250,000 of your money is protected, so there’s no need to stress about whether you could lose the money that you put in. And, on average, CDs have higher rates than high-yield savings accounts, which means you can get a better return on investment without taking on any added risk.
RELATED: Best CD Rates
The low risk and generous returns may make buying a CD seem like an easy call. But there actually are circumstances where you could come to regret putting your money into a certificate of deposit. Here are two of them.
1. If you need to access your money during the CD term
One of the biggest factors that could make you regret buying a certificate of deposit is if you need your money during the time it’s locked up in the account.
When you open a CD, you commit to keeping your money invested for a set period of time, with the specifics depending on which CD you choose. Usually, you have to agree not to withdraw funds for anywhere from three months to five years. And if you do end up having to take out money earlier, you’ll get hit with a penalty that eats into the interest you earn — or even your principal if you haven’t had the CD open long.
If you put money into a CD and find yourself having to take it out of the bank ahead of schedule, you could be left with regrets when you face this penalty. That’s why it’s so important to make absolutely sure you are not investing money you’re going to need during the term. So, for example, if you’re saving for car repairs or an emergency fund, you don’t want to use that money to buy a CD, as your withdrawal time is unpredictable.
Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards
Think carefully about your goals for the funds you’re investing and if there’s any realistic scenario where you might need the money sooner than planned. If so, buying a CD with that money is probably not the best choice.
2. If interest rates rise and you’re locked in at a lower rate
There’s another scenario where you could find that you regret buying a CD: if you purchase one and rates go up shortly afterward. You could be locked into a CD offering a lower rate than you’d be able to earn had you not made that investment — and you could miss out on potential returns because of it.
In January of 2021, for example, a 5-year high-yield CD most likely offered a rate somewhere around 0.63%. But in January of 2023, a 5-year high-yield CD typically offered rates somewhere around 4.28%. Of course, you’d only be two years into your 5-year CD had you bought it in 2021, so you’d have a choice between incurring an early withdrawal penalty or sticking with your low-rate CD for another few years. In this scenario, you missed the chance to invest at historically high rates instead of historically low ones.
You can minimize this risk by buying CDs with shorter terms — but that means you’re passing up the chance to lock in your high rate if yields happen to fall in the future. So before you buy a CD, you may want to research what moves the Federal Reserve (the U.S. central bank) has hinted it will make, as well as whether most experts believe rates are going to go up or down. Of course, no one can predict exactly what will happen, but you can still get a good idea of where most people think rates are trending.
If it looks as if rates are going to go up in the future, buying a shorter-term CD or skipping this investment altogether could be your best bet so you aren’t left with regrets. If, on the other hand, rates are likely to fall, it may be wise to opt for a longer-term CD to get today’s guaranteed high returns for years to come.
The good news is, if you understand why you might potentially come to regret buying a CD, you can make more informed choices about whether the investment is right for you. Just think about your goals for the money and whether you think rates will rise or fall and let your answers to those questions be your guide.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
[ad_2]