3 Common Mistakes in CD Investing and How to Avoid Them

Investing in a certificate of deposit (CD) can be a great option for many people. If your bank has FDIC insurance, this investment is covered for up to $250,000, so you aren't putting your money at risk. You can also generally earn a better return on your investment than would be available from a high-yield savings account.

While a CD can be a good place to put your money, you could also be left with financial regrets if you make certain common mistakes in CD investing. Here are three errors you'll want to be sure to avoid.

1. Choosing the wrong CD term

CDs typically require you to lock up your money for between three months and five years, depending which one you pick. If you take your funds out early, you face a financial penalty called an early withdrawal penalty. So one major mistake in CD investing is picking the wrong term.

If you are going to need your money in a few months, or in a year or two, you don't want to choose a certificate of deposit that would force you to leave your money invested longer than that. On the other hand, if you definitely won't need the funds for a while and you pick a CD with a short term and the interest rates go down, you may regret not locking in the high rate for longer.

Consider how long you want to leave your money invested in this particular CD, so you can pick a term length that makes sense. Typical terms available range from three months to five years, but depending on where you open your CD, you could find terms of a few weeks all the way up to a decade or longer.

2. Not shopping around for rates

The national average rates for a certificate of deposit are under 1.5% for all CD terms between one month and 60 months. For a 12-month CD, for example, the national average rate is 1.86%.

While these rates are higher than the national average APY for a savings account (which is 0.47%), they are still pretty low compared to what some CDs offer. For example, it's possible to find CDs offering APYs above 5.00%. If you don't shop around with multiple banks and find the best rates, you could leave a lot of money on the table.

Say, for example, you deposited $5,000 into a 12-month CD. The table below shows how much you could end up with if you have a 1.86% rate versus a 5.30% rate.

As you can see, one of these CDs leaves you much better off than the other -- so it's worth shopping around to make sure you find the best rates.

3. Allowing the CD to automatically renew without making sure that's right for you

In many cases, CDs will auto-renew at the end of your investment term. While this can be convenient if you want to keep the same CD, it may not be ideal if you'll need to get your money out sooner. And if rates have fallen, you could end up stuck in a CD that auto-renews at a lower rate than you could have had if you'd switched to a different CD instead.

Be sure to plan for when your CD term is done and explore all of your options for what to do with the invested funds when that happens.

Now you know how to avoid these three common errors, and ideally, you can invest in CDs successfully and grow your net worth over time.