Certificates of Deposit (CDs) are a popular choice for those looking to secure a fixed rate of return on their savings. However, to maximize the benefits of CDs, it’s crucial to avoid common pitfalls. In this article, we’ll explore five mistakes to avoid when incorporating CDs into your savings plan.

1. Choosing a CD Without Comparison Shopping

One of the biggest mistakes you can make is not shopping around for the best CD rates. Rates for similar-term CDs can vary significantly between banks, credit unions, and online-only providers. For instance, credit unions often offer higher CD rates than traditional banks. By comparing rates, you can ensure you’re getting the best return on your investment.

2. Allowing for Automatic Renewal Without Comparing Rates

When your CD matures, it may automatically renew into a new CD with the same term. However, this new CD might not offer the best rate available. During the grace period (typically seven to ten days), take the time to compare rates and see if you can find a better deal. If you find a higher rate elsewhere, you can ask your bank to match it or move your money to a different institution.

3. Not Checking Potential Penalties

Withdrawing money from a CD before its maturity date usually incurs an early withdrawal penalty. This penalty is often based on a certain number of days’ worth of interest. For example, a one-year CD might have a penalty of 90 days’ worth of interest. Understanding these penalties before opening a CD can help you make informed decisions about your savings.

4. Missing Out on Investing Returns

While CDs are a low-risk savings vehicle, they may not offer the highest returns. If you’re saving for a long-term goal, consider diversifying your savings strategy. Investing in a mix of stocks and bonds can potentially yield higher returns over time. Additionally, contributing to a retirement account like a 401(k) or IRA can help your money grow over a longer horizon.

5. Funneling Money to Savings that Should Pay Off Debt

If you have high-interest debt, such as credit card debt or payday loans, it may be more beneficial to pay off that debt before investing in a CD. Paying off a credit card with a 17% interest rate, for example, effectively earns you a 17% return. Balancing debt repayment with saving in a CD can help you achieve multiple financial goals simultaneously.

The Bottom Line

Investing in CDs can be a smart way to secure a fixed return on your savings, but it’s important to avoid common mistakes. By shopping around for the best rates, understanding penalties, and balancing your savings with debt repayment, you can make the most of your CD investments.

At O1ne Mortgage, we’re here to help you navigate your financial journey. Whether you’re looking to invest in CDs or need assistance with mortgage services, our team of experts is ready to assist you. Call us today at 213-732-3074 for personalized financial advice and support.