Why I Won't Open a CD Right Now

I have money to sock away -- but it won't go into a CD any time soon.

This summer, I've spent a lot more money than I did during summer 2020, when my family mostly stayed close to home. But I've still managed to not spend my entire paycheck, even with the enormous expense that is summer camp. And that means deciding where to put that extra money.

Right now, I'm thinking of putting most of it into a brokerage account to invest, since I'm all set with emergency savings. I may also put a small amount into a savings account.

But one place I won't put my money right now is a certificate of deposit (CD). Here's why.

CD rates are ridiculously low

Right now, even the best one-year CDs pay 0.30% to 0.70% interest. Most pay somewhere in the middle, around 0.50%.

Historically speaking, these rates are really low and unattractive, especially since today's savings account rates are comparable.

And that's why my money won't go into a CD any time soon. The whole point of a CD is to snag a good interest rate on your money in exchange for locking it up for a preset time. But with rates so low, I have zero motivation to do that.

Also, by opening a CD when rates are this low, you actually take a risk -- the risk that rates will climb and you'll get stuck earning less interest on your money while it's locked away (or you'll face a penalty for cashing out a CD early). And I see no reason to take that risk.

Because I don't need to sock more money away for emergencies, I'd rather invest my recent savings. Doing so might allow me to grow it into a much larger sum, especially if I choose my investments wisely.

At the same time, I would like to put money away for upcoming expenses, like the holidays (which, just wait, will be here before you know it). But since that's money I plan to use in the near term, a savings account is a more appropriate place for it.

One benefit of a CD is that it can prevent you from tapping into savings when you should leave that money alone. Or, to put it another way, some people find it useful to have the threat of a penalty to avoid touching their savings. Right now, I have several savings accounts -- one for emergencies, one for home improvements and a down payment for a second home, and one for travel and events (which I lob the holiday season into). I'm generally disciplined about only taking money out for the intended reasons, and since that system works for me, I don't feel the need to have a CD instead.

When interest rates are higher, saving in a CD can be a smart move. Right now, interest rates are nothing to write home about. So unless you have a compelling reason to open a CD, you're probably better off keeping money you don't plan to spend soon in a savings account or investing it in a brokerage account.