Opening Your First CD? 3 Pitfalls to Avoid

There's a reason so many people are looking to open CDs today. Rates for CDs are among the highest they've ever been. But that won't last forever.

Once the Federal Reserve decides to start cutting interest rates, CDs are apt to start paying less. So it's a good idea to get in on today's top rates while you can.

If you're new to CDs, there are certain mistakes you risk falling victim to. Here are three big ones you should try to avoid.

1. Not looking around for the best rate

CD rates aren't universal. Each bank sets its own rates for the products it offers. And those can vary, too -- meaning, you may find that some banks offer a 3-month or 9-month CD, while others don't offer CDs with those terms.

Our Picks for the Best High-Yield Savings Accounts of 2024

Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of July 1, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings Member FDIC.	APY 4.25% Rate info 4.25% annual percentage yield as of July 1, 2024	Min. to earn $1
Citizens Access® Savings APY 4.50% Min. to earn $0.01 Open Account for Citizens Access® Savings Member FDIC.	APY 4.50%	Min. to earn $0.01

Shop around for the best CD rates if you're new to them and don't really have a sense of what different banks are paying. Once you open a CD, there can be costly penalties for withdrawing your cash early.

To put it another way, if you open a 12-month CD at 5% and then find another one paying 5.05% a week or so later, you're out of luck. A little research could prevent that from happening.

2. Putting all of your money into a single CD instead of doing a ladder

You may be inclined to put all of your money into a single CD -- namely, whichever one you can find that has the best rate available. But that could end up being a mistake.

What if you end up needing some of your money to cover an unplanned expense? You can minimize this risk by having a separate emergency fund, but even then, sometimes life happens.

If you want to lower your chances of facing an early withdrawal penalty, set up a CD ladder instead of putting all of your money into a single CD with a single maturity date. For example, instead of opening a $3,000 CD with a 12-month term, you could open a 6-month CD with $1,000, a 9-month CD with $1,000, and a 12-month CD with your final $1,000. This way, some of your money frees up at different times.

3. Putting money into a CD that's meant for a far-off goal

CDs can be a great place to park some cash for a limited period of time. But if you're saving for a goal that's many years away, like retirement, then you're better off investing your money.

The reason? CDs may be paying 5% today (or even a little bit more), but the stock market's average annual return is 10%. And today's CD rates aren't the norm.

So let's say you're 30 and you have $3,000 to put into CDs as part of your retirement nest egg. Even if you're somehow able to snag a 5% return over the next 35 years (which is doubtful), that'll leave you with about $16,500. If you were to invest that money and earn a 10% return during that same time period, you'd end up with about $84,300 instead.

Now's a good time to open a CD, but don't rush into the process. Research your options, look at setting up a ladder, and make absolutely sure a CD is the appropriate home for your money before locking it away.