Here's Why I'm Still Saying No to CDs -- Even With Rates Over 5.00%

Image source: The Motley Fool/Upsplash

You might think that now is a good time to open a CD. After all, the Fed might (finally) be ready to cut interest rates. The best CDs are paying APYs of 5.00% or more -- so if you open a CD now, you can lock in a high APY before the Fed cuts rates.

But I'm not convinced. Despite the hype about CDs, I'm still not opening any CDs in 2024.

Here are a few reasons why you might want to say "no" to CDs, even at 5.00% APY -- and ideas for what to do with your cash savings instead.

CDs have one big risk that you might not notice (until it's too late)

Certificates of deposit (CDs) require you to deposit a set amount of money in the bank for a set amount of time, or "term." And in exchange, the bank commits to give you a fixed APY (annual percentage yield) on your savings.

For example, let's say you open a 12-month CD at 5.00% APY. Even if the Fed cuts interest rates during your CD's term, you still get that same agreed-upon yield for the full 12 months, as long as you leave your cash in the CD.

But CDs are not totally risk free -- if you take your cash out of the CD earlier than expected, before the term is up, you will owe early withdrawal penalties.

Early withdrawal penalties can take away some (or all) of the interest you would have earned from the CD. This can be a big risk for most Americans! What if you need your CD money sooner than you planned?

What to do instead of CDs: Unless you have so much extra cash that you are in no danger of pulling money out of your CD early, don't assume that CDs are the right choice for your savings. The best savings accounts pay APYs that are similar to (or better than) the best CDs -- and savings accounts don't have early withdrawal penalties.

CDs don't pay much higher yields for the risk you take

Here's another problem with CDs: if you're going to lock up your money, and run the risk of early withdrawal penalties, you should be compensated for that risk and commitment. The bank should pay you higher interest for agreeing to lock up your money in this way. But that's not how it works!

Even the best CDs don't always pay better APYs than the best savings accounts or money market accounts. Yes, it's true that if the Fed cuts interest rates soon, the APYs on savings accounts and money market accounts will likely decrease, too. Even if you could get 1%-2% higher yields from a CD, that doesn't seem worth locking up your cash. I prefer the flexibility of savings accounts and money market accounts.

What to do instead of CDs: Open a money market account if you want similar (or higher) APYs compared to the best savings accounts. Money market accounts are flexible and safe, like savings accounts, with no penalties for early withdrawal.

CDs aren't the best choice for short-term, medium-term, or long-term savings

When is the right time to open a CD? Personally, I don't think there is one. Because CDs have an unsatisfying combination of problems that makes them a mismatch for how I invest my money.

CDs: Wrong choice for money you need now

Everyone needs cash for everyday spending. Ideally, people should also try to build up an emergency savings account with cash that they can use on short notice. CDs can't be used for short-term savings, because of early withdrawal penalties. Savings accounts and money market accounts are better, because your money is accessible anytime without penalty.

CDs: Wrong choice for money you need soon

What about short- or mid-term financial goals? If you're saving for a down payment on a house, a wedding, or a dream vacation, some people might want to open a CD. But here's the problem: even these big, near-term goals can change sooner than you think. What if you find a great house and want to make an offer, but your down payment money is tied up in a 2-year CD? I prefer to have flexible access to any cash that I'm not investing in the stock market for longer-term goals.

CDs: Wrong choice for money you need later

I personally don't see the point of using 3-year CDs, 4-year CDs, or 5-year CDs. Any extra cash that you don't need in the next few years could be invested in the stock market. Stock values go up and down in the short term, but if your cash is truly available for long-term investing, it should be invested appropriately in stock and bond ETFs.

What to do instead of CDs: If you want higher yields than the best savings accounts, and you can afford to leave your money alone to (hopefully) grow for a few years, you should invest that cash in a brokerage account instead. Consider investing in bonds or diversified stock ETFs.

Bottom line

Opening a CD might be the right choice for some people, if you have lots of cash and need immediate income. But most people who are saving for retirement and trying to build wealth for the future will be better off keeping their short-term cash in a savings account .

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .