Maximizing Your Savings with Certificates of Deposit: Avoid These Common Mistakes

A Certificate of Deposit (CD) can be a smart choice for those looking to secure a fixed rate of return on their savings, especially when interest rates are high. By agreeing not to withdraw your money for a set period, you can earn more interest than you would with a traditional savings account. However, CDs require careful planning to avoid early withdrawal penalties or missing out on higher interest rates elsewhere. Here are five mistakes to avoid when incorporating CDs into your savings strategy.

1. Choosing a CD Without Comparison Shopping

Interest rates for similar-term CDs can vary significantly between financial institutions. For example, if you’re considering a one-year CD, it’s crucial to compare rates not just among banks, but also among credit unions and online-only providers. Credit unions often offer higher CD rates than traditional banks for the same term, according to data from the National Credit Union Administration.

While it may be convenient to open a CD at the bank where you already have your checking and savings accounts, doing so could mean missing out on higher yields available elsewhere. Take the time to shop around and compare rates to ensure you’re getting the best return on your investment.

2. Allowing for Automatic Renewal Without Comparing Rates

Shopping around is essential not only when you first open a CD but also when it matures. Many CDs automatically renew, rolling over into a new CD with the same term. However, you usually have a grace period—typically seven to ten days—during which you can decide whether to renew the CD or withdraw your money.

If you choose to renew the CD, check the interest rate your bank offers and see if there are any promotional rates you can request. If you find a better rate at another institution, you can ask your bank to match it or move your money to the new institution. This ensures you’re always getting the best possible return on your savings.

3. Not Checking Potential Penalties

Withdrawing money from a CD before its maturity date incurs an early withdrawal penalty, which is usually based on a certain number of days’ worth of interest. For instance, on a one-year CD, your bank may charge 90 days’ worth of interest as a penalty, with longer terms incurring higher penalties. This means your penalty could differ from other customers with the same rate and term, depending on your account balance.

There may be times when withdrawing money from a CD despite the penalty is worthwhile, such as if you can earn more in a different account. However, it’s crucial to be aware of the penalty when you open the account so you can make an informed decision later.

4. Missing Out on Investing Returns

A CD is a low-risk savings vehicle that guarantees a certain return, making it ideal for short-term goals like saving for a down payment. However, if you’re willing to keep your money saved for longer or take the risk that it could lose value, investing in a diversified mix of stocks may yield higher returns over time.

Consider putting a portion of your savings in a CD as part of a diversified strategy, while investing another portion in a brokerage account to take advantage of higher returns. Additionally, investing as part of your retirement plan through a 401(k) or individual retirement account can help your money grow over a long time horizon.

5. Funneling Money to Savings That Should Pay Off Debt

If you have high-interest debt from payday loans, private student loans, or credit cards, it may be more beneficial to pay it off before prioritizing saving in a CD. For example, paying off a credit card with a 17% interest rate effectively earns you a 17% return in the first year, which is higher than what you’d get from a CD or even the stock market.

The ideal approach may be to pay off debt while saving a portion of your funds in a CD, then adding more as your debt decreases. Financial decisions are often not an either/or scenario but rather a balance where you work towards multiple goals simultaneously.

The Bottom Line

When considering saving in a CD, you won’t face the risk of your money losing value if you keep it saved until its maturity date. However, there are other risks to consider, such as needing the money sooner than planned, ensuring you’ve secured the best rate possible, and making sure your money is being put to its best use. Avoiding common CD mistakes helps ensure you’re getting the best features of a CD without the potential drawbacks.

At O1ne Mortgage, we understand the importance of making informed financial decisions. If you have any questions or need assistance with your mortgage needs, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and achieve your savings goals.