Can you lose money on a CD?

In general, Certificate of Deposit (CD) A less risky way Increase your savings. However, this does not mean that they are 100% risk-free. As with any financial product, it’s important to know the potential pitfalls so you can get the most for your money.

In this article, we’ll explore the risks associated with CDs and how you can take steps to reduce them.

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Can you lose money on a certificate of deposit?

Generally speaking, CD is a safe place Keep your money. But you should keep the following points in mind while opening one.

FDIC Insurance

Always make sure the bank you open a CD with is FDIC-insured. This federal deposit insurance bank protects up to $250,000 in funds per account, so your money is safe even if the bank fails. You enjoy the same protections if you open a CD with an NCUA-insured credit union. Explore your CD options online now!

Early withdrawal penalty

The only way you can lose money on a CD is to withdraw your funds early duration Finally, most CDs have early withdrawal penalties, which can be steep depending on the length of the term and the amount of your deposit.

For example, a one-year CD may have penalties equal to three months’ interest, and a five-year CD may have penalties equal to 12 months’ interest. These penalties can eat into your principal and reduce your overall return.

To avoid early withdrawal penalties, make sure you can leave the funds in a CD until maturity. If you may need money soon, consider one No-penalty CD. These types of CDs may not have rates as high as long-term CDs, but they are still competitive and allow you to access funds early without incurring fees.

Fluctuations in interest rates

Another way CDs can potentially lose value is through changes in interest rates. CD rate are set when you open the account and are fixed for term. If interest rates rise after you open a CD, you won’t lose your original deposit, as you would if you invested in something like stocks. However, you may miss out on additional earnings.

To reduce interest rate risk, consider investing Short term CDs or CDs of various ladders which mature at different intervals. This way, you can take advantage of rising interest rates and ensure regular access to your funds.

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Inflation

Inflation reduces the purchasing power of your money over time, and if your CD’s interest rate doesn’t keep up with inflation, you’re essentially losing money. For example, if your CD earns a 2% annual return but inflation is running at 3%, you’re actually losing 1% of your purchasing power each year.

To counter inflation risk, open a CD When rates are high To lock in a better rate or choose a long-term CD, which often has a higher rate than a short-term CD. This can help you hedge losses from inflation.

Bottom line

Although CDs are generally considered a low-risk investment, there are ways you can lose money on them.

It’s important to be aware of potential risks and take steps to minimize them, such as avoiding early withdrawal penalties, building a CD ladder and opening an account when rates are high. By doing so, you can get the most out of your CD investment and achieve your financial goals faster