Locking in money at low interest rates in a certificate of deposit might sound like a bad money move. But in some cases, making a long-term commitment can be a smart move even if you end up having to make early withdrawals from your CD before it matures.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses how in some cases, getting a long-term CD makes sense even if you expect to have to pay early withdrawal penalties before it matures. Dan notes that Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and American Express (NYSE:AXP) all charge early withdrawal penalties that can range from three months to a full year of lost interest. Yet looking at rates from Pentagon Federal Credit Union, Dan notes that even paying those penalties can leave you with more interest over the long run under certain assumptions. Dan concludes that by being smart about penalties, you can maximize your CD income and give yourself maximum flexibility to structure your cash reserves as well.
Fool contributor Dan Caplinger owns warrants on Bank of America and Wells Fargo. The Motley Fool recommends American Express, Bank of America, and Wells Fargo and owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.