These Are the 5 Biggest Mistakes You Can Make With Your CD

Certificates of deposit (CDs) are a great way to grow your wealth without risking it in the stock market. But if you want to maximize their value, you can't just throw some money in the nearest CD and forget about it.

You need to understand the rules of the account and be aware of common pitfalls. Here are five of the most costly errors to avoid when using a CD.

1. Withdrawing funds from a CD early

Each CD has a term, which is the length of time you agree to leave your money in the account. Terms can range from a few months to several years, depending on the account you choose.

If you attempt to take money out of a CD before the term ends, you'll pay a penalty equal to several months of interest payments. And you'll have to take all your cash out at once. CDs don't allow for partial withdrawals.

2. Locking in a low rate

CD interest rates are typically guaranteed for the entire CD term. This makes them a popular investment when interest rates are falling on deposit accounts, as they're projected to do later this year. But it also makes them a poor choice when rates are rising.

If you invest in a CD, especially a long-term CD, when rates are rising, you could get stuck earning a low interest rate on your funds for years. In this case, it's much better to keep your cash in a savings account where you can take advantage of climbing interest rates over time.

3. Choosing a CD term that's too long for you

Long-term CDs could make sense if you don't plan to spend the money you need before the term is up and interest rates on savings accounts are falling or holding steady. But if one or both of these things isn't true, it's not a good fit for the reasons discussed above.

You might consider a short-term CD and then re-evaluate where you'd like to keep your money after that term ends. Or you could try a savings account or a CD laddering approach instead.

4. Forgetting about old CDs

When a CD matures -- that is, when the CD term ends -- banks typically reinvest that money in a new CD of the same term unless you intervene. You can request that it move the cash to a checking or savings account where you can either spend it or place it in a different account of your own choosing.

You want to keep track of your old CDs so that cash doesn't get automatically reinvested without your knowledge. Generally, this isn't the best thing for your money. When one CD term ends, shop around to see which CD has the current best offer if you'd like to reinvest rather than just sticking with the current bank.

5. Using CDs for long-term savings

CDs can be a good fit for cash you plan to use on a large purchase a few years down the road, but it's not ideal for money you don't think you'll need for decades. Even the best CD rates usually aren't close to the returns you can get from investing in the stock market over the long term.

Keep retirement savings in a retirement account and consider a taxable brokerage account for additional funds you want to put to work for you over the next five to 10 years.

Remember, when you open a CD, you're committing to leaving your money in that account. If you have any questions, it's best to seek guidance from the bank beforehand. This will help you avoid surprises down the road.