7 Myths About CDs: What To Know If You Want To Build Your Savings
Written by
Martin Dasko
Edited by
Zoey Quach
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According to a recent Gallup report, 41% of Americans say that rising living costs have become their biggest financial concern. With inflation eating up a larger portion of Americans’ savings, it’s more important than ever to find ways to ensure that your money is working for you.
When exploring the various options for investing your money, you’ve likely considered putting your funds into a certificate of deposit (CD). However, there are some myths and common misunderstandings about CDs that you should know. Here are seven of them to be aware of when trying to build your savings.
Myth #1: You’ll Lose Access to Your Money
“One of the most common myths I hear from our members around certificates of deposit is that you will lose access to your funds during the timeframe of the CD,” said Sarah Wicker, manager at Georgia’s Own Credit Union. “In reality, you still have access to your funds, but you may pay a penalty for withdrawing funds before the date of maturity.”
No, investing in a CD doesn’t mean having no access to your funds. Some banks even offer penalty-free withdrawals if you need to access your money before maturity, though you may lose out on any interest.
Myth #2: CDs Are Only for Long-Term Investments
A common misconception about CDs is that you should only use them for long-term investments. However, you can use a shorter term to boost your savings for any financial goals like an upcoming wedding or a house remodeling project.
“CDs can be for shorter or longer terms,” shared Scott Lieberman, founder of Touchdown Money. “The only thing that has to be long-term is that you can’t touch the money for the length of the deposit. You can invest in a CD for as little as three months.”
Myth #3: You Need Significant Money To Invest in a CD
Another common misconception about CDs is that you have to be well off to invest in them. The myth suggests that only wealthy people can benefit from investing in a CD.
“The truth is that these accounts can be opened with as little as $100-$500 in some cases,” noted Wicker. “These are a great resource for people at all income levels and a great way to begin saving, as these often pay a higher rate than a regular savings account.”
If you’re looking for a steady return on your money, you can start investing in a CD with limited funds. “You can invest with only a few hundred dollars. It all depends on the bank and what terms they’re willing to offer you,” Lieberman added.
Myth #4: CDs Don’t Provide a Decent Return on Your Money
A common misconception of investing in CDs is that you won’t get a decent return on your money.
While a CD won’t provide the same exceptional returns that could occasionally be found in the best stocks in the market, it’s worth pointing out that there are no issues related to massive market fluctuations. When you invest your money in a CD, you don’t have to worry about stubborn inflation figures and overall market sentiment impacting your savings. You don’t have to worry about what happens to the market at all, because your interest rate is locked in and you’ll be paid out at the set time.
If you shop around, you can find competitive rates for CDs that allow you to earn a decent return on your money without stressing about market swings and economic news. A CD can also offer higher interest rates than most other savings accounts.
Myth #5: Interest Rates Are Fixed
The misconception around CDs is that you must accept the first rate offered. This is not necessarily true because there are different types of CDs available.
“Some CDs do carry fixed interest rates, but variable-market CDs do exist,” shared Lieberman. “If you think the interest rates will increase — not a bad bet as the White House tries to keep a handle on inflation — a variable rate might be better for you.”
Myth #6: A CD Isn’t as Good as a Regular Savings Account
Some believe a CD isn’t as good as a savings account. While some investors will choose a savings account for the flexibility, a CD can be a helpful financial tool.
Even though a savings account will offer you easier access to your money, you won’t likely earn the same interest rate that you could with a CD.
Myth #7: There’s Only One Kind of CD
If you’re looking to build your savings, it’s important to know that there are various options for CD accounts and that you’re not limited to one choice. Some banks offer CDs with fixed or variable rates, and some banks will even waive any early withdrawal penalties.
As always, it is recommended that you explore your options to find the best financial tools for yourself. You may find that investing a portion of your savings in a CD will help you reach your financial goals faster without any of the stress that comes with leaving your funds in the stock market.
Wicker concluded, “At the end of the day, it is important to do your research and find a CD that best fits you and your financial situation.”
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