CDs Are More Risky Than You Think. Here's Why

CDs get talked about like they're the Fort Knox of saving money. You get a steady rate, guaranteed return, and your principal is protected (up to FDIC insurance limits).

But that doesn't mean they're 100% risk free. CDs come with strings attached, and if life throws you a curveball (which it loves to do) those strings have annoying penalties.

Here's what to watch out for.

Early withdrawals can sting more than you expect

When you open a CD, you're making a commitment. The bank gives you a guaranteed rate, and you agree not to touch the money until the term ends. If you break that term any earlier, penalties come in.

Some banks charge a few months of interest as a penalty. Others can claw back the entire term's interest.

And here's a sneaky fine point most folks overlook: Many banks don't allow partial withdrawals.

That means if you have a $10,000 CD and you only need $1,000 for an unexpected bill, too bad. You can't just pull out the $1,000 and leave the rest in the CD. You have to withdraw the whole CD, take the penalty on the full amount.

A quick workaround might be laddering your CDs, spreading smaller deposits across different terms to give you more flexibility as each one matures. If that strategy fits your goals, compare today's top CD rates and terms to see where your money can earn the most.

CDs can limit your long-term growth

CDs protect your principal, which is great. But they also cap your upside.

Even with today's stronger APYs (around 4.00%+ for competitive short-term CDs), CDs simply can't keep pace with long-term market returns.

For example, over the past 50 years, the S&P 500 has averaged roughly 10% annually.

Here's what that gap can look like over time:

• $10,000 in CDs earning 4% for 20 years: ~$21,900
• $10,000 invested in stocks earning 10% for 20 years: ~$67,000

That's more than triple the long-term growth. And that difference can be the exact reason someone hits -- or misses -- their retirement goals.

So while CDs feel safe, putting too much money in them (or locking in for too many years) can ironically cost you the chance to build real wealth.

Limited access can create real-life problems

One of the lesser talked about downsides of CDs is how they can end up steering your financial decisions. When your money is locked away for a set term, you don't have the same freedom to respond to opportunities or needs as they come up.

You might want to help your family, take advantage of a great travel deal, or jump on an investment opportunity. But the CD's timeline, not your own, ends up calling the shots on if and when you can make those moves.

That loss of flexibility can weigh on you. Savings should give you confidence and options, not a sense of being boxed in.

CDs can absolutely play a role in your financial life. But they're not as "risk-free" as the marketing brochures make them feel.

If you want more flexibility without giving up strong earnings, take a look at today's top high-yield savings accounts -- some are paying more than 4.00% while keeping your money fully accessible.