With interest rates at their highest levels in decades, many savers have been turning to certificates of deposit (CDs) to maximize the returns on their hard-earned money. That’s a smart strategy to utilize, considering that many CDs offer returns that outpace traditional savings accounts and even some high-yield alternatives. That lets you rake in hefty returns — and when you consider the other benefits CDs offer, it’s easy to see why these deposit accounts are so popular.  

Those benefits include the fixed rate of return that CDs offer. Unlike standard savings accounts, which are subject to fluctuating interest rates, CDs lock in a fixed rate for the entire account term. This feature is particularly attractive in the current environment, where rates remain high but are likely to change soon. 

Before rushing to open a CD, though, it’s important to understand that there are a few big mistakes you should steer clear of. By knowing what they are and how to avoid them, you can maximize the potential of your CD investment this fall. 

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3 big CD mistakes to avoid this fall

If you plan to open a CD soon, make sure you steer clear of these big mistakes:

Waiting too long to open one

One of the biggest mistakes you can make when opening a CD this fall is procrastination. While it might be tempting to try and wait for even higher rates to emerge, the current economic indicators suggest that now is the time to lock your rate in. 

With inflation cooling over the last four months, the Federal Reserve is now widely expected to conduct its first rate cut in September. When this happens, it could have a significant impact on CD rates, potentially marking the end of the high-yield environment savers have been privy to. By opening a CD now, though, you can secure one of today’s high rates before they start to decline. 

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Focusing solely on the APY

While a high annual percentage yield (APY) is undoubtedly attractive, it shouldn’t be the only factor guiding your CD selection. After all, other aspects can significantly impact the overall value and suitability of the CD. Some key factors to consider beyond the APY include:

The early withdrawal penalty

Life is unpredictable, and you may need to access your funds before the CD matures, so understanding the early withdrawal penalty is crucial. Some banks charge a flat fee, while others may forfeit a certain number of months’ interest. If you’re concerned about needing access to your money, a slightly lower APY with a more lenient early withdrawal policy might be more beneficial in the long run.

The minimum and maximum deposit requirements

CDs often come with both minimum and maximum deposit limits, so ensure that the CD you’re considering aligns with the amount you’re planning to invest. Some high-yield CDs may require substantial minimum deposits, which might not be feasible for everyone. Conversely, if you have a large sum to deposit, be aware of any maximum deposit limits that would reduce your APY.

The term length

The duration of the CD you choose is a critical factor, so be sure to weigh your financial goals and liquidity needs before deciding. While longer terms will lock in your rate for a longer period, guaranteeing your returns for longer, they also mean your money is tied up for an extended period. A shorter-term CD, even with a slightly lower rate, might be preferable if you anticipate needing the funds sooner.

The additional features

Some CDs offer unique features like rate bump-ups or no-penalty withdrawals. These features might make a CD with a slightly lower APY more attractive overall.

Not laddering your CDs

Another mistake that’s easy to make is putting all of your funds into a single CD. While this approach can seem straightforward, it often leads to missed opportunities and reduced flexibility, so you may want to ladder your CDs instead. 

When you ladder your CDs, you divide your investment across multiple CDs with different maturity dates. For example, instead of investing $10,000 in a single 5-year CD, you might split it into five $2,000 CDs with terms of one, two, three, four and five years. This gives you access to a portion of your investment at regular intervals, ensuring you have access to some of your funds without paying extra fees.

As each CD matures, you also have the opportunity to reinvest at the current market rates. This helps you take advantage of rising rates, should rates tick back up in the future, while protecting against being locked into low rates for extended periods. 

The bottom line

CDs can be a valuable component of a diversified savings strategy, offering stability and guaranteed returns. By avoiding these three common mistakes – waiting too long to open a CD, focusing solely on APY and not laddering your CDs – you’ll be well-positioned to make the most of the current high-interest rate environment this fall.