What to do With a Maturing CD: Decide What's Next
Make a Plan and Make it Happen
When a certificate of deposit (CD) matures, you’ve got options, including renewing, cashing out, and more. So, what should your next move be when a CD matures?
You may have a grace period—often ten days or so—to decide what to do and provide instructions to your bank. Doing nothing usually results in the CD renewing automatically: You start over with another CD that has the same term as before. But renewing is not necessarily your best option, and it’s always wise to proactively choose what happens to your money instead of letting your bank do it for you.
Time to Evaluate
When your CD comes due, take the opportunity to evaluate your financial goals and your current financial position.
How are things going? Do you want to keep that cash in a CD, or would it be better to put the money elsewhere? When you originally bought the CD, perhaps it made perfect sense, but several years may have passed since then, and a lot can change during that time. If you end up reinvesting into another CD (or allowing your bank to do it for you), make sure it’s a conscious decision—not a default option.
Evaluating your finances also helps you avoid treating your CD proceeds like money you found in an old pair of jeans. According to the “House Money effect,” people are tempted to splurge with “found” money. But you might need that cash for specific goals. Remember why you bought the CD in the first place. Perhaps it was for a down payment, your next car, or a safety net for life’s surprises.
You don’t have to decide right away. If you need time to think about it, move the money to a savings account while you explore options. You can reinvest in a CD if and when you’re ready. Unless your bank provides an incentive for renewing automatically, a temporary pause may not affect your finances.
Keeping it Safe
If you decide that you want to keep your money safe, evaluate all the alternatives. Several types of government-insured bank accounts provide security and a small amount of interest income.
Your current bank may have offered great CD rates when you first bought your CD, but other banks could be more attractive now. See how much more you might earn by switching banks, but don’t jump ship unless it’s really worth it. Calculate how many more dollars per year you’ll earn if switching is tempting, and be sure to include credit unions in your search. Changing banks takes time and energy, and your money might not generate any interest while moving between banks, so sometimes switching is not worth it.
Your money has been locked up for a long time, and now it’s free. If you like how that feels, consider using a liquid CD that allows penalty-free withdrawals (more or less) any time. The tradeoff is that you typically get a lower interest rate when you opt for freedom. But that might be a price you’re willing to pay.
Money Market Accounts
CDs often pay more than savings accounts, but they might not pay significantly more. If you value flexibility, explore money market accounts, which can pay almost as much as CDs—but they allow you to access your cash. Money market accounts aren’t as liquid as checking accounts, but the money is available in “chunks.” For example, you might receive a checkbook or debit card for occasional spending.
Money market accounts might allow you to make three to six payments from your interest-earning balance each month.
Form a Strategy
Decide how you want to invest your money. Do you want to put it all into one CD, or would you prefer to have some of your money available every six months or so? A CD ladder can make that happen for you. That approach may be helpful if you think interest rates are going to move (or if you could potentially need the funds at an unexpected time).
Pay Off Debt?
Another option is to use the money to pay off loans. Evaluate how much you pay in interest compared to the interest you earn on CDs. If you have toxic loans like high-interest-rate credit card debt, you might be better off eliminating the debt (and cutting up those cards).
Before you pay off a chunk of debt, make sure you can do without the money. Cash provides security, and you can use it to make high-priority payments (such as your mortgage, auto expenses, and healthcare costs). Paying down debt means you have less of a cushion to fall back on. At the same time, you can potentially eliminate a few monthly payments, which frees up cash flow to rebuild your savings. Plus, you can minimize interest costs by paying down debt.
It’s always wise to have emergency cash available in a bank account. If you want to reduce your debts, that’s a great idea. Just decide how much (if any) to keep in savings for any surprises. An emergency fund can potentially help you avoid taking on debt when something happens.
If you have plenty of cash available and no debt, you may want to consider different types of investments for longer-term goals (like retirement). CDs are safe, and that may be exactly what you need. But if you have a long time horizon and the ability to take more risk, a diversified portfolio could be appropriate. Ask a financial planner for advice on how to save for your goals.