4 Things I Did Wrong When I Purchased My First CD

There's no shame in making a mistake. In fact, I'm convinced that mistakes teach us more than getting things right ever could. Mistakes are seared in our minds, helping us map out a better way to do things the next time around.

One of my most memorable financial mistakes involves the first time I purchased a certificate of deposit (CD). While it was frustrating, the experience helped ensure that I would learn to do it right. Here's how I got it so spectacularly wrong the first time.

1. I went in with practically no information

The first time I purchased a CD, I knew just enough to be dangerous. I understood that CDs are a type of savings account offered by banks, credit unions, and many brokerage firms. I knew that CDs are FDIC-insured. What I didn't fully understand were the rules surrounding CDs or how my decisions would impact whether my money earned interest.

It's been decades since this happened, so I don't quite remember how much CDs were paying at the time, but I do recall being enthusiastic enough to open one without giving it much thought. Hey, free money is free money.

I never read the fine print regarding what would happen if I withdrew the funds before the maturity date. As someone who tends to be overly optimistic, I probably never imagined that I would need the money.

Mistake No. 1 was going into a financial agreement without full knowledge of how it worked.

2. I failed to shop around

My next mistake sounds ridiculous in retrospect. In those early days of adulthood, it never occurred to me that CD rates can vary dramatically. I heard about a rate that sounded good and jumped on it, never bothering to shop around for an even better rate (and I'll bet there were better rates available).

The idea of leaving money on the table is painful to me now, but that may be because I have experience leaving money on the table.

Mistake No. 2 was believing all banks, credit unions, and brokerage firms offer approximately the same rates on their CDs. They don't, and not shopping around can lead to a lower return.

3. I ignored the need for an emergency fund

When I invested in our first CD, we lived thousands of miles away from friends and family, and something always seemed to come up. Either someone got sick, there was a 50-year anniversary party we couldn't miss, or a baby was born. Between the issues that crept up and real, honest-to-goodness emergencies like a dead transmission or a higher-than-expected tax bill, we needed a hefty emergency savings account to draw from.

Unfortunately, in my excitement to earn interest, I took a chunk from our savings account to invest. And because life is full of surprises, we needed that money long before the maturity date arrived. The penalty for withdrawing the funds meant losing the interest I had been so eager to earn.

Mistake No. 3 was taking money from our emergency fund to invest.

4. I never set a goal

My entire goal back in the day was to earn a little money on funds that had been sitting in our savings account. There was nothing beyond that. Today, there's a good reason I assign each CD a purpose.

Say we haven't been on a vacation in a long time, or we're saving for a car. Knowing when we're hoping to go on vacation determines how long I want the CD term to be. For example, if we plan for a vacation next year, I'm comfortable with a 9-month or 12-month maturity date. If we're saving for a new car four or five years down the road, a 3-year or 4-year CD is a better fit.

Here's why setting a goal matters to me: Back when I invested in our first CD and lost all the interest I hoped to gain, it was irritating, but it didn't feel like it cost me that much because I didn't have a concrete plan for how we'd spend the money. Today, when I assign a goal to a CD, I am deeply invested in squeezing every last dollar out of it because I can't risk losing interest. Say I lose $300 in interest by withdrawing money earmarked for a car purchase. That's $300 more I'll have to pull from my checking account or savings account to cover the loss. It stings a little more.

The trick may not work for everyone, but it helps keep me on track.

Mistake No. 4 was failing to assign each CD a purpose and giving me a reason to keep my hands off of it until it matured.

CDs can be an amazing way to grow your money in a protected environment. But like everything else in life, your chances of success are greater when you know what you're doing and have a plan for the money you're about to earn.