Should I Keep My CDs or Cash Them In?

Certificates of Deposit (CDs) are financial products offering a fixed interest rate over a set period, providing a predictable return on savings. They are generally considered low-risk investments, as they are often insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits, protecting the principal amount. Many individuals find themselves holding existing CDs and contemplating whether to maintain their investment until maturity or to withdraw the funds prematurely. This decision involves evaluating the specific terms of the current CD against prevailing economic conditions and personal financial objectives.

Understanding Your Existing CDs

Before making any decisions, it is important to thoroughly understand the specific terms and conditions of your existing Certificate of Deposit. Begin by identifying the original principal amount deposited and its current value, which includes any accrued interest. This information is typically available on your account statements or by contacting your financial institution.

Crucially, determine the specific interest rate applied to your CD, noting whether it is a fixed rate that remains constant or a variable rate that can fluctuate. Understand how interest is compounded—daily, monthly, quarterly, or annually—and when it is paid out, as this impacts the actual yield. Identifying the exact maturity date is also essential, as this dictates the remaining duration of your commitment and when your funds become fully accessible without penalty.

A significant aspect to examine is the early withdrawal penalty, which is a common feature of most CDs. These penalties are typically calculated as a forfeiture of a certain number of months’ interest, often ranging from three to six months for terms over one year, but can vary based on the CD’s original term. Knowing this penalty helps in assessing the cost of breaking the CD. Some CDs might have specific features, such as being callable or step-up, which also affect your decision.

Factors Influencing Your Decision

Several external and personal financial factors should guide your decision regarding an existing CD. The current interest rate environment plays a significant role, as prevailing market rates for new CDs or other savings instruments directly impact the attractiveness of your current CD’s rate. If new CDs are offering significantly higher rates than your existing CD, the potential for greater returns elsewhere might outweigh the cost of an early withdrawal penalty. Conversely, if current rates are lower, maintaining your existing CD with its comparatively higher rate remains advantageous.

Inflation also influences the real return on your CD, eroding the purchasing power of your money over time. If the interest rate on your CD is lower than the prevailing inflation rate, your investment is effectively losing value in real terms, even as it accrues nominal interest. This scenario might prompt a reevaluation of your CD holdings, especially if alternative investments offer better protection against inflation. Considering your personal liquidity needs is another important factor, as CDs generally restrict access to funds until maturity without incurring penalties. If an unforeseen expense arises or a new investment opportunity requires immediate capital, the illiquid nature of a CD can become a disadvantage.

Your overall financial goals should also align with your CD strategy. If the CD is earmarked for a long-term goal and its rate remains competitive, keeping it can contribute to a stable financial plan. When evaluating alternatives, consider options like high-yield savings accounts or money market accounts, which offer greater liquidity and potentially competitive rates without the fixed term commitment. Other fixed-income securities, such as Treasury bonds or corporate bonds, could also be considered for different risk and return profiles, though these often carry different levels of market risk compared to FDIC-insured CDs.

Making Your Decision

When considering whether to keep your CD or cash it in, specific scenarios can help guide your choice. Holding onto your CD generally makes financial sense if it is nearing its maturity date, as the early withdrawal penalty might consume a significant portion of the remaining interest. Similarly, if your CD offers an interest rate that is notably higher than what is currently available for new CDs or other low-risk savings options, maintaining the existing CD allows you to continue benefiting from that favorable rate. If you have no immediate need for the funds and the penalty for early withdrawal would exceed any potential gains from reinvesting elsewhere, keeping the CD until maturity is the most prudent course of action.

Conversely, there are situations where breaking or reinvesting your CD could be more beneficial. If market interest rates have risen substantially since you opened your CD, and new CDs or other investment vehicles offer significantly higher returns, the potential for increased earnings might justify paying the early withdrawal penalty. A sudden and urgent need for liquidity, such as an unexpected medical expense or a critical home repair, might also necessitate cashing in your CD, even if it means incurring a penalty, as access to funds becomes paramount.

To determine the financial advantage of breaking a CD, it is helpful to calculate the net benefit or cost. This involves comparing the early withdrawal penalty to the potential additional earnings from reinvesting the funds at a higher rate. For instance, if a $10,000 CD with a 2% annual interest rate has a six-month penalty ($100), and you can reinvest it at 4% annually, you would earn an additional $200 per year on the same principal, offsetting the penalty within six months.