For people who don’t like risky investments, certificates of deposit (CDs) are often a great way to earn interest over a set period of time without market fluctuations affecting the earnings. And lately, with interest rates remaining high, many people have been taking advantage of these investments.
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What happens, however, when your CD “matures” — that is, you conclude the time period and have earned whatever interest was possible based on your rate? You now have a chunk of money that it might be all too easy to spend frivolously.
“When a CD matures, your choices are spending the money, saving the money or making more money,” according to Mary Grace Roske, spokesperson at CD Valet.
Savers who choose “make more money” need to be proactive by knowing when their CD term is up, shopping for the best rates and moving their funds to higher-earning accounts, she urged.
She and Bill Ryze, a certified chartered financial consultant (ChFC) and a board advisor at Fiona, explain what not to do when your CD comes of age.
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Only Rate Shopping at Big Banks
One common mistake Roske has seen is when people only rate shop at the big banks, when it is usually community banks and credit unions that offer the highest-yielding CDs.
“It’s a good idea to use CD rate calculators to determine your returns with different rates and terms to ensure you are maximizing your earnings,” she said.
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Moving the Money to Regular Savings
If you have plans to spend the money when your CD matures, move it to a high-yield savings account or money market account until you are ready to make your purchase, Roske said.
“You never want your money sitting idle when there is interest to be made.”
Withdrawing Your Money Too Soon
Perhaps the biggest mistake of all is not even letting your CD mature and taking the money out of the CD before its maturity date, according to Ryze.
“CDs are good investments because they offer higher rates when you commit to leaving your money untouched for a specific period. Early withdrawals can incur penalties, reducing your interest earnings,” Ryze said.
He recommended you plan well, and, before you even choose a CD, compare early withdrawal penalties across different banks.
Not Shopping for Better Rates
Failing to explore better CD options is a mistake, because different banks offer different CD rates, Ryze said. For example, one bank might set a rate as low as 3%, while another may have rates up to 5% and above.
“Settling for the first option means you miss out on better rates elsewhere,” Ryze said.
He recommended you research and compare rates from multiple banks to find the best rate.
Rolling Over to a Lower-rate CD
When your CD matures, don’t automatically renew it without comparing rates, either, Ryze urged. “Usually, banks offer automatic rollovers of CDs after maturity for your convenience. However, if rates have dropped, you could lock your funds at a lower rate for the next term, missing out on better opportunities.”
Roske added, “This is often the case with special promo CDs, so savers should always read the fine print in their account agreements.”
Alternately, you might consider other investment options to put your newly-matured CD funds into, Ryze suggested.
Ignoring Your Broader Financial Goals
Your CDs are not financial products in isolation, Ryze pointed out, but should be treated as part of your overall financial strategy.
“CDs might not necessarily align with your broader financial goals. For instance, you might have a high-interest debt. Paying it off would be a better use of funds rather than investing in a CD,” he said.
He recommended that you evaluate how CDs fit into your overall financial plan. “I advise prioritizing debt reduction or other investments that guarantee better returns.”
Forgetting To Consider Rising Interest Rates
If you see that rates are rising, you may not want to invest in a long-term CD, Ryze said. “Fixed-rate CDs lock in your investment yield. If rates increase, your CDs may lose purchasing power.”
Ryze advised opting for a CD ladder with staggered maturity, which enables you to invest at higher rates as they become available.
In order to avoid making these and other mistakes, speaking with a financial advisor can help you make the smartest move for your newly gained CD earnings.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planner: What Not To Do When Your CD Matures
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