This CD Investing Mistake Could Leave You Earning Way Less Interest Than You Expect
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High-yield certificates of deposit (CDs) are offering unprecedented rates right now. Unfortunately, even if you've done your research carefully, found a great CD, and made sure to maximize your return on investment, you could end up earning way less interest than you thought.
This could happen due to a simple CD investing mistake anyone could make. Read on to learn about it so you can avoid it.
This mistake when investing in CDs could be a costly one
CDs have a specific duration or term that you must leave your money invested. For example, you can choose a 6-month, 1-year, or 5-year CD. No matter how long the length, the rate of return you're promised by the bank only lasts for the designated term.
At the end of the term, your bank may auto-renew your investment if you don't tell it to do something else. So if you had money in a 6-month CD, it would just roll it over into another 6-month CD when your initial term ended.
Unfortunately, not all banks end up moving the money into a new CD paying a comparable rate. There have been numerous reports online of investors finding out that the money they thought was invested at competitive rates (around 4.00% or so) was actually invested at extremely low rates -- even as low as 0.05%.
Depending on the disclosures and terms of your investment, banks are absolutely allowed to renew your CD at a lower rate if that's what your agreement is. And many do. Sadly, this could mean you miss out on the chance to earn the once-in-a-lifetime rates investors are enjoying today while your money sits there earning far less than the rate of inflation.
How can you avoid this CD investing mistake?
To make sure this doesn't happen to you, find out what your bank does when your CD ends. Does it deposit the money in savings? Move it to another CD? You need to know the answer to this so you can understand what your options are.
However, in most cases, no matter what your bank promises to do, you're going to want to take action when your CD matures. Whether your money is being moved to a savings account or another CD, the option the bank chooses may not be the absolute best one.
Say you were getting 3.85% on a 1-year CD, the term is ending, and the bank has a comparable one it will move your money to. But there could be other CD offers out there from other banks that pay more. The Ascent's guide to the best 1-year CD rates shows many options above 5.00%. So you'd probably want to move your money to a new account yourself.
The only way you're going to get the best returns is to research your options each time your CD matures and pick the best new place to put your cash. Fortunately, this is pretty easy to do.
Just set a calendar reminder for when your CD term is going to end, act within the grace period after it (often this is around 10 days), research what yields are out there, and move your money to the CD offering the very best rates available at that time. If you do this, you'll never leave money on the table.
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