3 Reasons to Say No to CDs, Even With Rates as High as 5.15%

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Certificates of deposit (CDs) are offering yields as high as 5.15% right now. That's an impressive return, especially since it wasn't too long ago investors got excited if they could earn 2% or 3% on a high-yield CD.

You may be tempted to buy a certificate of deposit when you look at those rates. However, while this might seem like a good idea on the surface, there are three really good reasons to say no to CDs despite the generous yields on offer right now.

1. You're locking up your money

The single biggest reason you should not buy a CD is because these are not liquid investments. You have to give up access to your money for the duration of the CD term. While you can take your money out of the CD early, you'd be hit with a substantial penalty for doing so.

If you have even a single doubt about whether you can leave your money locked up until the CD matures, it's simply not worth buying one. The last thing you want is to invest, then experience a surprise expense you can't cover. You don't want to have to decide between charging your unexpected costs on a credit card or breaking your CD and getting penalized.

The reality is, while a 5.00% return seems pretty decent, it's not that great once you take into account that inflation has been above 3.00% all year. You're trading in your ability to use your money when you want to, and your buying power just isn't improving all that much. The trade-off may not be worth it.

2. You can earn a better return elsewhere

There's another good reason why it makes good sense to pass up on a CD: You aren't going to earn more than around that 5.15% range when you buy one.

If you opt to put your money into the stock market instead, though, you can invest in one of the safest things out there -- an S&P 500 index fund -- and reasonably expect to earn 10.00% average annual returns over the long term.

Now, it doesn't make sense to invest money in the stock market if you might need it soon. There's too much of a chance you'll buy when prices are high and then experience a market crash. Then you'll have to sell at a loss, since you don't have time to wait for the market to rebound.

To minimize this risk, it usually makes sense not to invest unless you can keep your money in the market for two to five years or so. Since a lot of CDs also require you to tie up your money for a couple years, it makes sense to compare what you'd earn on those CDs to what equity investments could earn.

The math is clear that earning 10.00% is better than earning 5.15%.

3. Savings accounts are paying a similar rate

Finally, it's important to take a look at savings account rates. When you do, you may find buying a CD makes even less sense.

There are high-yield savings accounts paying as much as 5.31% right now (though savings account rates aren't locked in like CD rates are). That is higher than the yields CDs are offering , and you don't even have to agree to lock up your money. Why not just put your money in savings where you can access it if you need it and earn more than a CD would pay you?

For all these reasons, it's pretty clear you should say no to CDs in most situations. Put your money into savings or a brokerage account instead.

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