Is it Possible for a CD to Lose Money?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Can a CD Lose Money?

Certificates of Deposit (CDs) are considered safe investment options because they offer fixed interest rates and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, for each account ownership category. However, there are scenarios where you might feel like you’re losing money with a CD.

Interest Rate Risk

If you lock in a CD at a lower interest rate and then rates increase significantly, your money is tied up, earning less than it could in a new, higher-rate CD or another investment. This is an opportunity cost rather than a direct loss of your initial investment.

Inflation Risk

Inflation can erode the purchasing power of the interest earned on a CD. If inflation rates exceed the interest rate of your CD, the real value of your money could decrease over time, meaning you might be able to buy less with your investment when the CD matures.

Early Withdrawal Penalties

Withdrawing your money from a CD before it matures can result in penalties, which could eat into your principal investment in some cases. The penalty amount varies by institution and could be equivalent to several months or even a year’s worth of interest, depending on the terms of the CD.

Credit Risk

While CDs are generally safe due to FDIC insurance, there’s a slight risk when investing in CDs offered by non-bank financial institutions or those that exceed the insured limit. Always ensure your CD is FDIC-insured and within the insurance limits to mitigate this risk.

How To Minimize The Risk Of Losing Money In A CD

While a CD can lose money, there are ways to minimize the risk. One way is to choose a longer-term CD. The longer the term, the less likely inflation will outpace the interest rate.

Another option is to invest in a CD ladder. This strategy involves investing in multiple CDs with different maturity dates. That way, even if one of your CDs loses money due to inflation, you will still have others that mature later and maybe earn a higher interest rate by then.

Conclusion

While the scenarios described above can affect the effective return or value of your investment in a CD, actual losses to the principal amount invested are rare and usually occur due to early withdrawal penalties. By understanding the terms of your CD, including the interest rate, maturity date, and withdrawal penalties, you can make an informed decision that aligns with your financial goals and risk tolerance.

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Frequently Asked Questions

Can you lose principal in a CD?

The answer is no, as long as you don’t need the money before the CD matures. Your principal is always safe in a CD. However, there are other ways that CDs can lose money.

Why have CD rates dropped?

CD rates often drop when the Federal Reserve lowers interest rates. This is because banks and financial institutions typically set their interest rates on deposits based on the benchmark rates established by the Fed. When the Fed lowers these rates, banks receive lower returns on the money they lend, and as a result, they often decrease the interest rates they offer on products like certificates of deposit (CDs).

Are CD’s FDIC insured?

Yes, certificates of deposit (CDs) are FDIC-insured as long as they are held at an FDIC-insured bank or, in the case of credit unions, insured by the National Credit Union Administration (NCUA).

Why would I choose a government bond over a CD?

A person might opt for a government bond over a CD if they are seeking potentially higher returns. Government bonds can offer higher yields compared to CDs, especially when interest rates for bonds are favorable. Additionally, government bonds are considered very safe investments, as they are backed by the full faith and credit of the issuing government, adding an extra layer of security for the investor.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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