There are many misconceptions surrounding certificates of deposit (CDs). Unfortunately, if you fall for common CD myths, you could make the wrong choice with your money and end up regretting it.
You don’t want your hard-earned cash to go to the wrong place because you jump into an investment without knowing the truth about it. That’s why you should forget about these three common CD myths and learn the actual facts.
1. “CDs are risk-free”
Many people think CDs are risk-free because they’re FDIC-insured. But FDIC insurance just protects you if the bank goes under. It doesn’t mean there are no financial risks to putting your money into a certificate of deposit.
The reality is that there are some risks associated with this asset. The biggest risk you take is an interest rate risk. When you buy a CD, you agree to lock your money up for the duration of the CD term. You’ll likely pay a penalty if you take your money out early.
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When you lock up your money, you take a risk that you’ll be stuck in a CD during a time when interest rates go up. If rates increase by big margins while you own the CD, you could find yourself earning a much lower return than you could be earning. In fact, if your return is below the current rate of inflation, your money could effectively lose buying power.
You must consider this risk when deciding whether locking money up in a CD makes sense.
2. “You’ll always get hit with penalties if you take money out of a CD early”
There’s also a misconception that every CD charges a penalty for withdrawing funds. There are actually some that don’t. True, there are a smaller number of penalty-free CDs, but there are still good options, including Ally Bank’s no-penalty CD.
If you’re hesitating about buying a certificate of deposit solely because you’re afraid to make a commitment to stay invested, look into no-penalty CDs on offer to find one paying a competitive rate.
3. “You can’t lose money on a CD”
Finally, the last big myth that you need to forget is the idea that you cannot lose money on a CD.
If you withdraw funds early from a CD with a penalty, you could end up with less money than you put into it. Many people don’t realize this because they assume they’ll only lose the interest they earned, not their principal balance.
The reality is that if you take out money shortly after buying the CD, you may not have earned enough interest yet to cover the penalties, and they’ll come out of your principal. This is why it’s so important to make sure you can stay committed to your investment before diving in — or to find a CD that doesn’t charge this penalty.
Once you forget about these myths and learn the truth, you can decide if CD investing is really right for you or if your money belongs elsewhere instead, like in a high-yield savings account. You can earn a similar annual percentage yield (APY) in one (although, it won’t be fixed like a CD’s rate) and have more flexibility with your money. You’ll also have the insight you need to find the right certificate of deposit to add to your portfolio so you can start earning competitive yields to grow your wealth.
