3 Huge Mistakes You Might Make When Opening a CD This July

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Are you thinking of opening a CD before July comes to an end? If so, that's smart.

The Federal Reserve is next scheduled to meet on July 30 and 31. During that meeting, the central bank might finally decide to move forward with its first interest rate cut -- something it's been talking about doing since the start of the year.

Interest rate cuts have the potential to be great for consumers, since they can translate to lower borrowing costs for products like loans and credit cards. But they can also be a bad thing for people with money in the bank, since they can lead to lower savings account and CD rates.

And that's why you may want to act quickly if you're interested in opening a CD. Right now, many CDs are paying APYs of 5.00% or even a little more. But we don't know what rates will look like following the Fed's first cut.

At the same time, it's important to be strategic when opening your next CD. Here are three big mistakes you should make every effort to avoid.

1. Using a CD to house your emergency fund

It's important to have money set aside for emergency expenses at all times. Those expenses could run the gamut from medical bills to home repairs. Or you might need an emergency fund to pay all of your bills if you end up out of a job through no fault of your own.

But one thing you shouldn't do is put your emergency fund into a CD. Because an emergency can strike at any time, you don't want money in a CD. Removing your cash from one early generally results in a costly penalty, the exact amount of which will depend on your bank.

As a general rule, it's a good idea to have enough money set aside for emergencies to cover three months of essential bills. So if your essential monthly expenses equal $2,500 and you have $7,500 to your name, you're in great shape. But that money should stay in a regular savings account -- not a CD.

The good news, though, is that thanks to today's elevated rates, you can earn almost as much interest in a high-yield savings account as a CD. And while it's true that savings accounts rates aren't locked in like CD rates, you get the benefit of more flexibility.

2. Choosing a term that doesn't align with your financial plans

It's known that CD rates could fall once the Fed begins its interest rate cuts. So your goal this July may be to lock in the highest interest rate possible on a CD, regardless of its length, or term.

That's not the best approach to opening a CD, though. Rather than chase the highest rate, you should choose a CD that fits with your financial goals and plans.

Let's say you find the best rate today on a 12-month CD. But what if the money you're putting into that CD is cash you might need sooner?

Say you got engaged last month and are trying to set a wedding date. You might assume you're safe with a 12-month CD. But if you're able to get a better deal on a wedding venue next March because it's considered an off-peak time, then you may decide to go for it.

In this situation, though, you're not necessarily in the best shape if your money -- money you may have wanted to use to pay for your wedding -- is tied up in a 12-month CD that won't mature until July of 2025. Here, a 6-month CD reads like a safer bet, even if it means settling for a slightly lower rate.

3. Not setting up a CD ladder

The downside of opening a CD is risking a penalty if you withdraw your cash before it matures. So rather than open a single CD this July, an option you may want to consider instead is a CD ladder.

With a CD ladder, you take your money and split it up into different CDs with varying terms. The goal is to set yourself up so a portion of your money frees up every few months, or at an interval you're comfortable with.

For example, you may be inclined to open a 12-month CD this July because that's the best rate offered by your bank. But if you end up needing money after seven months, you're looking at a penalty. So instead, a good bet could be to take your money, split it into four, and open a 3-month CD, 6-month CD, 9-month CD, and 12-month CD with equal deposits.

July could be a good time to lock in a CD while rates are up. But make sure to avoid these potentially costly mistakes in the course of opening one.

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