Think About Penalties Before Your Invest in CDs
Certificates of deposit represent a safe and secure way to save money. By committing to park your money in an insured CD for a specified time, you can get the maximum amount of interest at the minimum risk. However, the penalties for early withdrawal can be steep.
A new report form Bankrate shows that withdrawal shows that 89% financial institutions will seize some of your invested principal if you make an early withdrawal from their CD products and the interest earned is not enough to pay the penalty.
This means that you can actually lose some of the money you invested, in addition to losing out on the interest.
According to Bankrate, the most common early withdrawal penalty on 3-month and 6-month CDs is three months’ worth of interest. This rises to 6-months’ worth of interest for 1-year and 2-year CDs.
With 5-year CDs, the penalty for early withdrawal is to forfeit a full year’s worth of interest.
It’s always attractive to opt for longer-term CDs since the interest offered gets better as you move from 3 month to 6 month to multi-year CDs.
Committing to longer-term investments is also a sign of having one’s investing heart in the right place: it represents a true commitment to long-term saving.
However, reality often gets in the way of our long-term plans. Emergencies arise that force us to liquidate investments to meet current needs.
For this reason, financial planners caution that you be realistic about the things that happen in life, and to hedge your bets accordingly. With CDs, this means not putting all your money into long-term CDs.
Instead, you can “stack” your savings into several different CDs, with different time commitments. That way, if you must withdrawal some of your invested funds early, you can take the needed funds from shorter-term CDs so the penalties will not be as great.
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