Why I Wouldn't Open a 3-Month CD -- Even With Rates at 5%

Have you seen the rates on certificates of deposit (CDs) lately? You can earn 4%, 5%, or even more on your money, just by agreeing to leave it in a CD. And you might assume those rates are only available on longer-term CDs, but you'd be wrong. Alliant Credit Union is offering a 3-month share certificate (that's credit union speak for "CD") with an APY of 4.25%. And Western Alliance Bank is offering a 3-month CD through the financial platform Raisin -- it's paying 5.30% APY.

CDs with three-month terms aren't as widely available as those falling between six months and five years, but they are still available from some banks and credit unions, and they can be an asset to those looking to build a CD ladder.

I'm not opening any CDs right now, even though a 3-month CD would give me a savings boost in exchange for a short time commitment. Here's why.

I want to keep my funds liquid

I'm a brand-new homeowner -- I closed on my mortgage less than a month ago. It's been a long process, and because I made the effort to save money ahead of time, I have a real emergency fund for the first time in my life. I know how expensive owning a home is, and the only way I was going to feel comfortable buying one was if I knew I had money in the bank in case something went wrong.

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But an emergency fund represents savings that should be available at all times -- not locked up in a CD. If something broke in my new home and I needed the money in that CD, I'd have to break the term early and pay an early withdrawal penalty. So instead, I'm keeping my emergency fund in my high-yield savings account. A CD of any term length just isn't for me right now.

It doesn't seem likely that rates will fall drastically in the next couple of months

Speaking of savings accounts, in addition to higher CD rates, we're also seeing higher rates on high-yield savings accounts and money market accounts. If I can also earn 4% or 5% with one of these for at least the next couple of months, I don't see much point in locking my money up in a CD. And my high-yield savings account is currently paying 4.20% -- it's not the highest rate out there, but the account's other features make it the best bank account I've ever had.

Honestly, I'd be more inclined to take the plunge on a longer-term CD, say for a year or 18 months, if I had the cash to spare. It doesn't seem very likely that the rates on those will be the same by the time those terms are up -- the Federal Reserve is expecting one rate cut for later this year, but could potentially cut rates four times in 2025. But a 3-month CD opened now will mature later this year, and the rate on 3-month CDs could very well be the same as it is now. CDs are great for locking in a rate for a long period -- and three months is anything but.

Should you open a 3-month CD right now?

Personal finance is just that -- personal. What works for me may not work for you, and vice versa. Honestly, the rates on short-term CDs are stellar right now -- it's been years since we saw such high rates. So if a short-term CD will work for you (you have extra cash saved and a set timeline for it -- say, a great vacation or a wedding you'll be paying for in three months), it's worth investigating them to see what kind of deal you can get.

Just be sure to pay attention to these factors:

• Minimum required deposit: Some CDs require you to deposit at least $500 or $1,000 (or more) to open the account. Others can be opened with as little as $1.
• Early withdrawal penalties: If you break your CD term early, you'll owe a portion of the interest you've earned -- or possibly even some of your principal balance, if you haven't yet earned enough interest to cover the penalty.
• CD maturation date: Once your CD matures, you'll need to decide what to do with the money. If you don't act, your bank will likely roll the cash into a new CD with the same term -- and by then, rates may have fallen and you'll be stuck.

Right now, 3-month CDs might be a great fit for you and your cash -- just take the time to find the best rate possible.