3 Reasons to Stay Away From CDs, Even With Rates at 5.60%

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Certificates of deposit might be a lucrative investment, but they’re not right for everyone. Keep reading to learn when a CD is the wrong money move for you. [[{“value”:”

Certificates of deposit (CDs) give you a fixed interest rate in exchange for locking your money up for a set term. The best CD rates today are paying up to and slightly above 5.00%, with one CD from a credit union in California even offering a 9.50% APY on a maximum $3,000 deposit. Considering that the first CD I ever owned had a 0.50%-ish APY (it was 2011), these rates are surely not to be taken for granted.

But personal finances aren’t a one-size-fits-all concept — and CDs aren’t the right investment for everyone. In fact, if you agree with any of these three reasons, you might be better served with another type of investment.

1. Meeting a minimum investment might be a problem

Many of the best CDs require a minimum opening deposit, like $1,000. These deposit requirements vary by bank, but I’ve seen them as low as $0 and as high as $50,000. While the variety of CDs on the market ensures that most people can find a deposit requirement they can meet, some investors might find these requirements a barrier to opening an account.

If you don’t have enough savings to meet minimum requirements, you might be better served by a high-yield savings account. Though savings accounts have variable APYs, they’re currently on par with some of the best CDs.

Another solution is to buy CDs through the savings platform Raisin, which requires a minimum deposit of just $1. Though you might not find every possible term length (or even the most competitive rates for certain terms), it could still help you invest in CDs if you can’t meet minimums elsewhere.

2. T-bills have almost identical rates — but with an added tax benefit

Treasury bills (T-bills) are issued by the U.S. Department of the Treasury and are backed by the U.S government up to any amount. Like CDs, T-bills have a fixed interest rate that applies to your deposit for the length of your term. They also have very good rates right now, many as lucrative as the top-paying CDs. A recent auction of T-bills, for example, had the following rates.

Why would you get a T-bill if CDs have similar rates? Well, for one, you can buy T-bills with as little as $100, which would help those investors who can’t meet the minimum on CDs. More importantly, you don’t pay state taxes on interest earned from T-bills, whereas CD interest is taxed at both federal and state levels. So, if you live in a state with high income taxes (like California or New York), you might net more interest from a T-bill than a CD, especially if your income puts you in a high tax bracket.

One small note: You can’t buy T-bills like you would a CD through a bank. Instead, you buy them through an auction. This isn’t hard and can be done through your account at TreasuryDirect.com. But because T-bills are auctioned, you won’t know your rate until after the auction is over. That said, T-bill rates don’t fluctuate immensely, so your rate will likely be close to the last auction.

3. Long-term investors might fare better in the stock market

Investing in the stock market is risky, and especially now, with high interest rates still costing some of its biggest companies. But if you’re interested in investing for a longer period, say 20 to 30 years, you might be better served by it than opening a short-term CD.

Over the last 50 years, the stock market has averaged a 10% annual return. Although returns can swing immensely by the year — one year it might be -5.6% while the next it’s 22% — over a very long period, the average return typically flattens out to a steady rate. This is why it’s ideal to start investing while you’re young, as you can balance lows with the highs. All in all, if your goal is to maximize your returns over a long period, consider investing in a brokerage account instead of a CD.

Full disclosure: I have several CDs right now, and I plan on adding one or two more before the current rate cycle is over. I also invest consistently in the stock market. In short, CDs and stocks aren’t mutually exclusive and can each play a role in a larger strategy.

If, on the other hand, you don’t have much money to invest with, want to limit your state tax burden, or are after greater returns, there are other investments out there that could benefit you more. Consider, then, those investments listed above (savings accounts, T-bills, and the stock market) or add them to your CD strategy to cover all your bases.

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