Short-term CD account mistakes to avoid this April

If you're looking for a way to earn a return on your savings right now, your decision may be more difficult than you think. The stock market has gone through significant ups and downs recently and, in general, there's a widespread sense of uncertainty about where it will head over the next few months. The market's volatility makes it a risky investment right now for savers looking for a safe place to put their money. 

Banks and credit unions offer a variety of ways to store your money in relatively stable accounts right now, but the current economic climate makes choosing which type of account to open a tricky decision. You'll typically find banks offering two types of interest-earning accounts: variable and fixed. Variable rate accounts such as high-yield savings accounts and money market accounts have competitive rates right now, but the fact that those rates can rise and fall with Federal Reserve decisions, means you could see your rate go down later this year if the Fed lowers rates as some predict. 

With stocks and variable rate accounts being a riskier choice for savers, certificates of deposit (CDs) emerge as a stable fixed-rate option in the current economic environment. 

"[CDs] can provide a low-risk option for money that clients know they won't need for a specific time frame," says Gloria Garcia Cisneros, a certified financial planner (CFP) and wealth manager at investment planning and financial management firm LourdMurray. "This type of product won't give you long-term returns like stock and bonds will, but it will give you stability for cash."

CDs are split into two general lengths: short-term (one year or shorter) and long-term (longer than one year). Short-term CDs offer some distinct advantages right now, but locking in on those advantages without considering the downsides could result in costly mistakes. Below, we outline short short-term CD mistakes to avoid this April. 

Earn more interest on your money with a short-term CD here now. 

Short-term CD mistakes to avoid this April

As you consider investing your money in a short-term CD this month, make sure you stay away from these three strategic errors: 

Focusing only on rates

It can be hard not to put all your attention on the relatively high rates that short-term CDs offer this April. At today's rates, it's easy to find a short-term CD with an annual percentage yield (APY) of at least 4%. Additionally, some of the short-term CDs you'll find on the market right now have higher APYs than long-term accounts. 

However, focusing solely on rates can put you at a disadvantage when your CD matures. Yes, getting a high rate is an important part of opening a short-term CD right now. However, because your CD will mature in one year or less, your account might mature at a time when CD rates have fallen below what they are this month. If you wanted to open another CD at that time, you'd earn less interest than you likely would have if you initially opened a long-term CD. Additionally, due to the abbreviated CD term, even interest earned at a slightly higher rate with a short-term CD will be less than what can be secured with competitive, long-term CD rates, thanks to the latter's extended interest-earning potential.

Secure a top rate for your short-term CD today.

Not depositing enough money

CDs use compounding interest to calculate how much you'll earn at maturity. The key to earning the most money you can from a CD, then, is to give that compounding interest plenty of time to grow your balance. If you open a short-term CD right now, you're cashing in on the good rates available this April at the expense of giving your money time to compound. Therefore, you need to compensate for that lack of time with a bigger deposit that can earn more in the short amount of time your account earns interest. If you miss this nuance and deposit less than what you're able to, you'll miss out on valuable returns.

Opening a short-term CD with a local bank instead of an online bank

Local banks are a fitting place to open a CD if you prefer face-to-face interaction. A local bank can provide a personal feel you typically don't get if you open a CD via an online bank. However, choosing a local branch could be a misstep, as online banks tend to offer higher rates than banks with brick-and-mortar locations. 

For example, big banks with physical locations offer CDs with rates of less than 0.05%, in some cases, while online banks typically offer much higher rates — above 4%. That disparity in rates should be enough to convince you to forego the personalization that a local bank provides in exchange for higher rates. Also, opening a CD at a rate lower than what inflation is at right now — 2.4%, based on the latest data — effectively means that the value your dollar is losing is greater than the return your CD deposit is earning. With the possibility of rates decreasing later this year and the Fed meeting next month to discuss possible rate changes, opening a short-term CD this month guarantees you lock in a high rate before possible rate decreases happen in the coming weeks or months.

Is a long-term CD the better choice this April? 

In many cases, a long-term CD is a better choice right now. While rates aren't quite as high for long-term CDs as they are for short-term CDs, they're still outpacing inflation, which is a benefit of opening a CD this April.

Also, there's some speculation that the Fed will cut rates later this year. Since Fed rates are an important influencer of CD rates, cutting rates would likely lead to CD rates falling, too. Locking in a long-term CD today ensures you earn a guaranteed return at a fixed rate that's higher right now than it will likely be this summer. 

However, you'll need to remember that many banks will charge you an early withdrawal penalty if you pull money out before maturity. So, be prepared to leave your money in your CD, even if the term is a year or more.

If the thought of locking up your money for more than a year is uncomfortable for you, consider negating the risk by either opening a no-penalty CD (which doesn't charge a penalty for withdrawals before maturity) or consider building a CD ladder, a strategy that combines short- and long-term CDs, says Geri Hopkins, chief operations officer at Skyla Federal Credit Union.

"I think the biggest drawback to CDs is the lack of cash liquidity," Hopkins says. "Unlike a savings account, if you need to withdraw money from a CD, you're likely to pay a penalty. For this reason I often advocate for CD ladder strategies, as this can help savers free up a chunk of money on a regular schedule, just in case they need it."

The bottom line

Moving your money into a short-term CD this April can provide excellent returns, assuming you avoid some costly mistakes. While their rates are high, short-term CDs put you at risk of your account maturing when rates are lower than they are now. If you want to open another short-term CD at that point, your account would likely earn lower returns than if you opted for a long-term CD today. Additionally, because short-term CDs don't give your deposit a lot of time to compound any interest it earns, you run the risk of depositing too little money to generate a significant return.

Long-term CDs are a viable alternative but present liquidity risk — your money is tied up for more than a year and the chances of you need to withdraw it early, and thus get stuck with an early withdrawal penalty, are significant. You can offset this risk by opening a no-penalty CD (although your rate will likely be lower than a traditional CD of the same length) or implementing a CD ladder that uses short- and long-term CDs. 

Have more CD questions? Learn more about your options online today.