3 Reasons You Might Regret Opening a CD

Image source: Getty Images

If you're looking to open a CD this summer, you're likely in good company. CD rates are the highest they've been in years, but today's rates may not last much longer. Once the Federal Reserve starts cutting rates, CD rates could start to decline -- so you might as well get the best deal while you can.

But it's important to think carefully about opening a CD. Here are three reasons you might regret doing so.

1. Oops -- you needed the money

It can be tempting to open a CD to take advantage of today's outstanding rates before they start to drop. But don't let your (understandable) desire to get an easy return drive you toward a poor decision.

Before you open your next CD, assess your financial needs. Make sure you can afford to temporarily part with the money you're tying up.

You might think you're fine to open a CD because you have a complete emergency fund. And that's something to be proud of. But if you were warned by your HVAC company last year that your heating system had seen better days, then you may end up kicking yourself for locking money up in a CD when a replacement might be in your future this November.

2. Gosh darn it -- you chose the wrong term

You may find that you can snag the best rate on a 12-month CD today compared to other terms. But before you go with that, think about what it means to tie your money up for an entire year. And definitely reconsider if some aspects of your life are in flux.

For example, if you may be relocating, you might need that money before the one-year mark to pay for a move. Or, if you're getting serious with your significant other, you might need the money to buy a ring.

To avoid a world of regret, it could pay to set up a CD ladder. Rather than put all of your money into a 12-month CD, for example, divide it into four and open 3-month, 6-month, 9-month, and 12-month CDs with equal deposits instead. This way, some of your cash will free up every quarter so if your plans change, you won't automatically be stuck facing a penalty for cashing out a CD early.

3. D'oh -- you should've invested the money instead

CDs are a great place to stash your money on a short-term basis -- say, for a goal that's five years or less away. But you might sorely regret opening a CD if you do so to save for retirement.

While CDs may be paying well today, the 5% rate you might snag pales in comparison to the 10% average annual return the stock market has delivered over the past 50 years. So rather than put money you're earmarking for your senior years into a 12-month CD or a CD ladder, consider putting it into a brokerage account or IRA where you could invest it and grow it even more.

The last thing you want to do is open a CD and give yourself a head smack for botching that important financial decision. Think carefully before you put money into one.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .