Understanding the Risks Associated with Certificates of Deposit (CDs)
Monday, 13 May 2024, 16:00
3 Reasons Why CDs Are Not as Risk-Free as You Think
CDs are often touted as being 100% risk-free, but that's not actually the case. Learn about three risks you're taking when you put your money into a CD.
1. Early Withdrawal Penalties
- Penalties vary by bank and by CD, but typically amount to around 90 to 365 days of simple interest.
- If you have to take funds out early, you may lose both gains and some of the principal.
2. Impact of Inflation
- If you're stuck in a CD paying less than inflation rates, your buying power decreases over time.
- Inflation can outpace CD rates, leading to a loss of potential gains.
3. Opportunity Cost
- By choosing CDs over market investments, you may limit your potential returns and wealth-building opportunities.
- Investing in higher return assets like S&P 500 index funds can offer more growth.
Consider these risks before deciding if CDs are right for you.
This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.