3 Reasons CDs Aren't Worth Buying, Even With Rates Above 5.00%

You've probably heard a lot of buzz about how high certificate of deposit (CD) rates are right now. With many CDs boasting rates above 5.00%, these investments haven't offered such high yields for almost two decades.

Those rates sound great, so you may be tempted to put some of your money into CDs. But before you do, consider these three reasons why they may not be worth buying -- even at today's rates.

1. CDs are an illiquid investment

The biggest problem with CDs is you give up access to your money when you open and fund one. You can't sell your CD. You can't take your money out before the term ends without paying a penalty. It's stuck there.

If you need to take the money out early, you'll get hit with a penalty. You could keep your money in a savings account instead, earn a similar rate, and be able to access your cash whenever you need it. Or you could buy Treasuries, which also offer similar yields to CDs. But unlike CDs, you can sell Treasuries on a secondary market where your gain or loss will be determined based on market conditions. So it's possible you won't lose money at all by exiting early.

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With better options out there that provide a similar return on investment (ROI) but don't require you to leave your money invested for months or years, it may not be worth opting for a CD.

2. You'll get a lower return on investment than the market could provide

You aren't going to earn as much by investing in CDs as you could if you invested in the stock market. Specifically, an S&P 500 index fund is likely to produce a 10% average annual return over time, based on historical data. Your CD is not going to do that.

Now, investing in the market is riskier than buying CDs. But an S&P 500 fund is a very low-risk investment as long as you have a long enough investing timeline. It's true that you could lose money on an S&P 500 fund if you buy it, a market crash happens, and you have to sell before the market recovers. But if you have time to wait out a downturn, it's very unlikely you're going to lose money buying this fund.

Basically, CDs would only make sense if you needed the money so soon that you couldn't put it in the market -- but not so soon that you risk having to break the CD term early. That's a pretty specific timeline, and not many people find themselves in that situation very often.

3. Rates aren't that high relative to inflation

The last reason why CDs aren't really worth buying is that those 5.00% rates aren't that impressive when you consider how much you're earning after taking inflation into account.

The inflation rate has been hovering around the 3.00% to 3.5% range this year. So when you "make" 5.00%, most of those gains are just helping you keep pace with rising prices. You're only gaining around 1.5% on your money in terms of your real increase in buying power.

For all of these reasons, you may just want to skip CDs. Put your money into the stock market to earn a better ROI if you don't need it soon, and keep it in savings or maybe Treasuries if you do.