Buying CDs Makes No Sense for Most People, Even at Rates Above 5.00%

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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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.