CDs Seem Like a Good Investment With Rates Above 5.00%. For Most People, They Aren't

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CD rates are currently above 5.00%. Since this is higher than rates have been for many years, they seem like a good investment -- especially since they are insured by the FDIC, so losing money isn't likely.

Although buying a CD may appear to be a good thing to do with your cash, for most people, it simply makes no sense to buy one. That's because CDs are good only for people who can tie up money for a very specific and narrow time window. It's rare for most people's investment goals and timelines to align perfectly with this time frame.

CDs are a good option in very limited situations

CDs are not good for most people because it makes sense to invest in them only if:

• You can leave your money locked up for a period of a few months to a few years, depending on what term length you choose when you buy your CD
• You cannot leave your money alone long enough that it's safe to invest it in the stock market.

It is important to realize that your money only belongs in CDs when both of these things are true. Here's why.

You cannot put money into a CD that you may potentially need soon because CDs require you to make a commitment to stay invested for the whole term. This term usually ranges from three months to five years with most banks. If you take money out early, you're hit with penalties.

You don't want to lose your returns or even some of your principal to penalties, so it makes no sense to buy CDs unless you are 100% confident that the money isn't going to be necessary for a few months to a few years. This means any money you might need for the short term doesn't belong in a CD.

On the other hand, if you have an investing timeline of at least a few years, the stock market is a better place for your money. You can buy an S&P 500 index fund that could produce 10% average annual returns over the long haul, as that's what the S&P 500 has done for decades. There's a greater risk of loss in the stock market than with a CD, but as long as your timeline is long enough to wait out any market downturns, that risk is still pretty minimal with an S&P fund.

With long-term investments better off earning higher returns in the stock market and short-term investments better off in a savings account where they are accessible, that simply doesn't leave much -- if anything -- for CDs.

Does it ever make sense to buy a CD?

While most people don't have a need for a CD, there may be some very limited circumstances where buying one makes sense.

Say, for example, you're saving for a home down payment and plan to buy in two years. You don't have enough time to put the money in the stock market, but if you absolutely 100% for sure won't be buying sooner, you could put some of this money in a 2-year CD .

Even that's a risk, though, because if the perfect house comes up after 18 months, your money would be tied up and you'd have to pay a penalty to get it out early.

Ultimately, even this example shows why it just makes little sense for most people to choose CDs. Think twice if you're considering one and make sure there are no better options for your funds.

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