This common mistake can obliterate CD earnings

In March 1, 2018

Common CD Mistakes
We invest in CDs for their earnings… that tidy little return that rolls right back into the investment while keeping our money safe. It’s one of the most common places for a retiree or business owner to park their cash reserves because it’s safe from stock market fluctuations, with a payoff that’s often better than a money market fund or savings account.   

Investing in CDs (certificates of deposit) can be a smart investment and many focus on the highest interest rate possible, but that’s not the only selection criteria that’s important.  

The number one most common mistake? Investing in long-term CDs that lock up funds, making it difficult to react when a better rate comes along… compounded by early-withdrawal penalties when money is moved.

Why do people go with a long-term CD? Since the bank has more time to do something with the investor’s money, longer terms usually offer the highest interest rates. If someone is focused on finding the best return on their investment, they may buy a five- or ten-year CD knowing they won’t need the money during that time, forgetting it’s also unavailable during that period to take advantage of another opportunity.  

Might we suggest staggering terms by using a CD ladder for more flexibility? Learn more here.
You also might appreciate this article:
4 Smart Moves to Get the Best CD investment Rates Possible.

Because the Federal Reserve resets interest rates every six-to-eight weeks, CD rates can change quickly. More aggressive investors on the prowl for better opportunities to improve their earnings might want to suddenly change to another CD once they realize the interest rates have improved.

If they’re less experienced, a reminder from their banker about early-withdrawal fees can come as a nasty surprise. Even worse, they don’t realize there are fees and they move the money, only to find out later that the fees have wiped out any financial advantage they had by switching CDs, or dipped into their principal. A bank can also deny the request for early withdrawal.

The smarter option? A nice mix of terms allows far more flexibility than investing a large lump sum of money into a single CD product. As each one nears the end of its term and is available for renewal, it’s a nice opportunity to review what’s happening with the marketplace and determine if changes are appropriate.

It’s also useful to look outside of what a single bank recommends or automatically renewing the same CD for another term, since other products at another bank may have more attractive interest rates. For example, local community banks may offer a stronger interest rate when compared to a national chain bank.

If you have questions about certificates of deposits, managing cash flow, the best place to hold large sums of money, or rates on CDs currently offered by Horizon Community Bank, stop in at a branch today or contact your financial advisor. This can help you maximize your return.

Send this to friend