Buying CDs Makes No Sense for Most People, Even at Rates Above 5.00%
KEY POINTS
- Giving up access to your money will cost you in early withdrawal penalties if you may need it soon.
- Tying up money in CDs that you won't need for several years or longer also doesn't make sense, because you can earn more by investing in the stock market.
CD rates are above 5.00% right now, which is a much higher rate than banks have offered for a very long time.
With their FDIC-insured status and impressive yields, certificates of deposit have become really tempting for many investors. In fact, locking in a CD at today's rates may seem like a once-in-a-lifetime opportunity.
The reality is, though, that while CDs may be tempting, they actually make absolutely no sense for most people. Here's why.
CDs have a Goldilocks problem
In the old children's story, Goldilocks (an intruder in the Three Bears' home) finds that the bears' porridge she tastes is either too hot or too cold. Only one of the bowls was just right. The Goldilocks principle is now applied to a number of different fields -- and it can apply to CDs, too.
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American Express® High Yield Savings
APY
4.25%
Rate info
4.25% annual percentage yield as of July 23, 2024
Min. to earn
$1
Open Account for American Express® High Yield Savings
On American Express's Secure Website. |
APY
4.25%
Rate info
4.25% annual percentage yield as of July 23, 2024
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Min. to earn
$1
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UFB Secure Savings Account
APY
5.25%
Rate info
To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts.
Min. to earn
$0
Open Account for UFB Secure Savings Account
On UFB's Secure Website. |
APY
5.25%
Rate info
To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts.
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Min. to earn
$0
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Western Alliance Bank High-Yield Savings Premier
APY
5.31%
Rate info
5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.
Min. to earn
$500 to open, $0.01 for max APY
Open Account for Western Alliance Bank High-Yield Savings Premier
On Western Alliance Bank's Secure Website. |
APY
5.31%
Rate info
5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.
|
Min. to earn
$500 to open, $0.01 for max APY
|
See, CDs are just right only for investors who have a very specific investing timeline. If you need your money too soon, you can't buy a CD. And if you don't need your money for too long, buying a CD makes no sense at all.
When you buy a CD, you have to commit to leaving money invested for anywhere from a few months to a few years or you pay an early withdrawal penalty. If you may need your money before this time is up, buying a CD doesn't make sense because you risk getting hit with fees that could eat up your returns or even reduce your principal. So you can't put funds you'll need in the short term into a CD.
Now if you have a longer timeline, you also don't want to put your money into a CD. The stock market is a better place for it. You can open a brokerage account and buy an S&P 500 index fund that will pretty reliably pay you a 10% average annual return (historically speaking). This also presents minimal risk as long as you have time to wait out potential market downturns if you buy at a bad time.
Since you're better off earning 10% rather than 5%, you also shouldn't put money into a CD that you won't need for the long term. Doing so would mean giving up the chance at that larger return.
Basically, this means that if you have money you can leave alone for between a few months and a few years, but you definitely won't need it sooner and definitely can't leave it invested longer, then you should buy a CD. But everyone else should opt for a high-yield savings account or stock market investments instead.
Don't buy a CD unless your timeline is just right
No matter how tempting CDs may seem right now, you should steer clear if you don't fit into that very small group of people with an investing timeline that's just right for them.
Instead, consider opening a brokerage account or check out alternatives like one of the best high-yield savings accounts. You'll likely find you're a lot better off with these options.
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Our Research Expert
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, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
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