2 Reasons You Might Regret Opening a CD
It’s tempting to invest in certificates of deposit (CDs) right now. CDs are actually a low-risk investment because they are FDIC insured. This means that up to $250,000 of your cash is protected if the bank fails. CDs also offer very good prices, offering yields of over 5.00%.
But while buying CDs has some great benefits, it’s not an investment that’s right for everyone. Here are two reasons why you might regret investing in CDs:
1. You need to withdraw money sooner than expected
The biggest reason you regret buying a CD is because you have to get your money out before the CD expires.
There are many options for CD terminology. The most commonly used CDs come in terms ranging from three months to five years, but there are a variety of terms you can choose from. Some banks also offer one-month CDs. But what they all have in common is that they require you to commit to keeping the money invested for that period of time.
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If you are found to be unable to maintain the funds invested, there will be consequences. You will likely be assessed a penalty equal to a certain number of days of interest. Depending on the terms and conditions of the CD, interest rates can range from 7 days to 365 days.
Failure to pay this penalty can leave you with big regrets as you lose some of your gains. If you have to withdraw money from your CD before you earn enough money to cover the penalty, you could potentially lose some of your principal. To avoid this, don’t commit to buying a CD unless you’re 100% sure you can set aside the money for that period.
2. Missing out on better returns
If you invest money you should have in the stock market and miss out on the returns, you might regret ever opening a CD. could do I earned it.
The stock market will generally provide a better return on your investment than CDs, at least in the long term. By investing in an S&P 500 index fund, you can expect consistent annual returns of 10% over a period of several years or more. It’s much better than the results you can get from any CD.
the only reason ~ no Opening a brokerage account and investing money in the market to get better interest rates comes with the risk of loss. Short investment timelines increase this risk. You don’t want to buy stocks in a recession, have to sell to get money out, and can’t wait for the market to recover. If your market timing is bad and you don’t have at least a few years to wait for a recovery, you can lose a lot of money.
If you have the money, you can leave it for a few years, but if you want to get a higher interest rate, you should market it instead of a CD. Otherwise, you may regret limiting your ROI and miss out on potential profits.
Fortunately, you can avoid these two big regrets if you think carefully about your options for growing your money. If you need cash on an uncertain schedule (e.g. for an unplanned expense) or you won’t need it for some time (e.g. for retirement), CDs aren’t for you.
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