3 Mistakes You Might Make When Opening a CD

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KEY POINTS

  • CDs offer savers a chance to earn more interest on their money.
  • It's important to put thought into a CD rather than dive in.
  • It's a good idea to shop around for rates and carefully consider term lengths.

Don't fall victim to these.

The money you have earmarked for emergency fund purposes should go into your savings account and stay there until you need to take a withdrawal. But you may have extra money at your disposal you don't want to put into a regular savings account. At that point, you may decide to open up a certificate of deposit, or CD.

The upside of opening a CD is earning a higher interest rate on your cash than what you might get with a regular savings account. And also, like savings accounts, with a CD, your principal deposit is protected (provided it doesn't exceed $250,000, as that's the limit per depositor the FDIC will guarantee).

But if you're going to open a CD, it's important to make sure you're doing so strategically. And that means avoiding these blunders.

1. Signing up for too lengthy a term

CDs come in different terms. You can generally open a six-month CD, a 12-month CD, a two-year CD, or a five-year CD. And some banks may offer even more choices than that.

But one thing you don't want to do is lock yourself into a longer-term CD. The reason? We don't know if interest rates will continue to rise, but there's reason to believe they will. The Federal Reserve doesn't seem to be done hiking up interest rates, and so in a few months from now, we may find that CD rates are higher than they are today. If you sign up for a long-term CD, you'll potentially miss out on the chance to earn more interest on your money.

2. Not looking at what different banks are paying

If you have a bank you like, you may be inclined to open a CD there. But before you do, do some rate shopping. Perhaps another bank will pay you more interest on a CD than what your current bank is willing to pony up. This especially holds true if you do your banking at a brick-and-mortar establishment, because online banks commonly offer higher interest rates on savings accounts and CDs than physical banks.

3. Choosing a CD over a brokerage account

If you have money you don't need for emergencies, you may be inclined to put it into a CD for a higher interest rate. But if you really want to snag an impressive return on that cash, don't settle for a CD. Instead, open a brokerage account and invest your money there. 

Investing in a brokerage account means taking on some risk. But you might easily score double or triple the return by investing your money than what you'll get by playing it safe and sticking with a CD. 

Be careful when opening a CD

A lot of people are interested in putting money into CDs right now because rates have grown more appealing over the past few months. Opening a CD could be a good way to score a higher interest rate on some of your cash. Just be careful to avoid these blunders if you're going that route.

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