3 Reasons Not to Open a CD This August -- Even With Rates at 5%

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If you've been paying attention to certificate of deposit (CD) rates , you probably know that today's are outstanding. It's pretty easy to find a 5% CD, and if you dig around, you might do even better.

But while today's CD rates are tempting, it may not be the best time for you to open one. Here are a few reasons not to put your money into a CD this August.

1. You're not sure you're happy with your emergency fund

The downside of putting money into a CD is that you have to commit to whatever term you sign up for, whether it's six months, 12 months, or longer. If you take your money out of a CD before its maturity date, you'll risk an expensive penalty, the exact amount of which will depend on your bank.

You need to be confident in your emergency fund before opening a CD. If you're not, then you're better off waiting. Generally, your emergency fund should have enough money to pay for three to six months of essential expenses. That's meant to cover unplanned bills and get you through a period of unemployment.

You may have enough money in emergency savings to cover three months of bills. But if you're worried that's not enough and that you should be aiming higher, then you shouldn't open a CD. You're better off waiting so you don't risk an early withdrawal penalty.

2. You just bought a house

It's common to have a home inspection when buying a house. But sometimes, issues don't reveal themselves until after you move in. If you're a brand-new homeowner, it's probably best to hold off on tying money up in a CD until you're sure there aren't any lurking problems that could be expensive to fix.

Let's say you moved in a few weeks ago. You won't be using the heat for a few months. But you may not realize there's an issue with it until you need to warm up your house, which may not be the case until November.

Remember, home inspectors aren't perfect, and issues can be missed. Issues can also pop up months after an inspection. You may want to keep your extra money in a savings account in case your house ends up needing work.

3. You're trying to save for retirement -- and you're nowhere close to ending your career

CDs can be a smart move for near-retirees who want to boost their nest eggs without taking on risk. But if retirement is decades away, you shouldn't use CDs as a way to save for that milestone. Instead, you should probably turn to the stock market, which has historically delivered significantly higher returns.

You may be impressed with today's 5% CD rates. But over the past 50 years, the stock market's average annual return has been 10%. Also, you're only looking at earning 5% on your money in a CD for a limited period -- generally 12 months. A better bet is to invest your money so it has the potential to grow at a higher rate for many years.

Say you're looking to put $5,000 into a 12-month CD with a 5% APY. That means you'll earn $250 in interest. But if you put that $5,000 into a stock portfolio delivering a 10% annual return, in 20 years, it'll be worth $33,600. If you wait even one year to start investing that money, you'll end up with $30,600 instead. So by opening a 12-month CD instead of investing, you might gain $250, but you risk losing out on $3,000.

There are plenty of good reasons to open a CD this month while rates are strong. But if these situations apply to you, then you should either keep your money in a savings account or invest it in a brokerage account or individual retirement account (IRA) .

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