Parking cash in a certificate of deposit is a low-risk investment.
"Maybe they're in retirement and looking to generate income. Maybe it's the down payment on a house you're going to make 12 months from now. Maybe you lined this up to coincide with when tuition payments are due," Greg McBride, Financial Analyst for Bankrate.com, said.
However, what if an emergency pops up? Or a better investment? Then, you'll need that cash out.
"That means cashing in a CD earlier than you had intended," McBride said.
Early withdrawals can mean leaving money on the table.
"Maturities that are shorter than one year, you're typically going to forgo three months of interest. For maturities between one year and five years, you're typically looking at giving up six months of interest," McBride said.
McBride notes the most important thing to know.
"If your interest earnings are not enough to cover the penalties, we found that 90 percent of financial institutions will dip into your principal in order to
cover that penalty," McBride said.
That kind of defeats the purpose of a CD.
"The whole reason people invest in CDs in the first place is to preserve their principle, yet early withdrawal penalties can put that principle at risk," McBride said.
Avoid putting your finances in a tight spot by thinking ahead.
"When you're looking at CDs it's important that you can live without the money for the period of time you're signing up for it. If you're not sure, you have other available options to you," McBride said.
Those options include savings or money market deposit accounts that you can get to at any time.
"There are also CDs out there that allow you to make penalty-free withdrawals prior to the maturity. That could be another option as well," McBride said.