Can You Lose Money in a CD? | The Motley Fool (2024)

FAQs

Can You Lose Money in a CD? | The Motley Fool? ›

In sum, yes, you can lose money on a CD. But as long as you don't withdraw too early, you'll be left with at least your principal. Keep your money in for the entire term, and you won't lose anything at all -- you'll have your principal, plus money earned on today's high APYs.

Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.

Can you lose money in a brokered CD? It's possible to lose money in a brokered CD if you sell it on the secondary market for less than face value. You can also miss out on interest earnings in a brokered CD if the issuer calls it prior to maturity.

Disadvantages of investing in CDs

As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty. The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD.

While there's no risk of losing any of your money in an FDIC-insured CD, you could potentially miss out on the opportunity to earn a better rate if you reinvest shorter-term CDs when rates decline. Plus, you'll potentially lose out on better returns offered by other investment vehicles with greater growth potential.

While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.

Certificates of deposit (CDs) are perfectly safe places to stash your cash, whether they're purchased online or at a brick-and-mortar bank, as long as you follow a few rules. Make sure the money in your CD is federally insured against losses by either the Federal Deposit Insurance Corp.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

If you stay invested until term maturity, you won't lose your principal. But if you look to get out early, you could lose money. Brokered CDs don't have early withdrawal penalties like bank CDs. To get out of a brokered CD early, you have to sell it.

Cons of investing in CDs

Early withdrawal penalties can cost a flat fee or a percentage of the interest earned, depending on the financial institution. Inflation can hurt returns: You'll need to be careful when investing in CDs during changes in interest rates or you could effectively lose money.

Why doesn't Dave Ramsey like CDs? ›

Ramsey, on the other hand, has described CDs as nothing more than "glorified savings accounts," and says CD returns are typically too low to make the investment worth bothering with. He suggests putting your money into a mutual fund instead of a CD.

That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn. CDs have specified term lengths, ranging from three months to five years.

5 tips for keeping your money in CDs insured

Stay at or under $250,000. Ensure your CD deposit and the expected interest will total less than the $250,000 limit. Open CDs at different banks or credit unions. This approach might take more work, but you can utilize CDs at different rates and terms.

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.

CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.

Certificate of deposit (CD) ladders are a great strategy for individuals looking for a secure, fixed-rate investment to build over time. It is ideal for longer-term savings because you'll be penalized for any early withdrawals.

CDs opened at FDIC-insured banks, or credit unions backed by the NCUA, are guaranteed by the federal government. Should the bank or credit union fail, your savings won't be lost, as long as you're within deposit limits.

What happens if I take my money out of a CD early? Typically, you must pay an early withdrawal fee if you take money from a CD before maturity. You may not owe a fee if you take money out early from a no-penalty CD, as long as it's been more than six days since you opened the CD.

Both money market funds and CDs are considered relatively safe investments, potentially providing returns in the form of interest or dividends. Money market funds are generally more liquid than bank or brokered CDs.

Key Takeaways

Certificates of deposit (CDs) may pay higher interest rates but also lock your money in for a set term. If you have to take money out of your CD before it matures, you will generally be subject to early withdrawal penalties.