CD Rates Are Above 5.00%. That Doesn’t Mean You Should Invest in One

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CD rates are at recent record highs, but there are still better investments. CDs don’t make a lot of sense for most people — find out why. [[{“value”:”

In recent years, CD rates have typically been around 2.00% to 3.00% or below, even for high-yield CDs. That changed when the COVID-19 pandemic led to surging inflation, prompting the Federal Reserve to raise interest rates repeatedly. Now, it’s very easy to find CDs offering rates above 5.00%.

With rates up so much, it’s tempting to believe CDs are a great investment that you should put some money into. The reality is different, though. For most people, investing in CDs simply is not the right move despite the fact there are better options out there now than in the past.

Here’s why you may want to pass up buying certificates of deposit, even though there appear to be some good opportunities within this asset class.

CDs mean giving up access to your money

The biggest downside of CDs has always been that buying them requires giving up access to your money. You have to commit to staying invested for the duration of the CD term, or else you’ll find yourself facing a penalty that could eat away at the interest you earned and even cause you to lose some of the principal you put in.

In the past, the justification for giving up the freedom to use your own funds was that CDs paid a higher rate of return than savings accounts. That’s not really the case right now. The rates offered by high-yield savings accounts are competitive with, and sometimes higher than, the yields you’ll earn with CDs.

If you can get the same or a better rate and keep your money accessible to you, why not just do that instead of locking up your money in a CD?

You’ll be limiting your ROI when you buy CDs

There’s another big reason you should steer clear of CDs. A rate of around 5.00% is fine, but not great. And once you’ve put your money into your certificate of deposit, that rate is not going up. You’ll earn those yields exactly if you leave your money in for the length of the CD’s term.

If you invest in the stock market, on the other hand, it is very reasonable to expect that you will earn a better return on investment than a CD could offer. The S&P 500 has historically provided 10% average annual returns, which is twice as good as 5% returns.

There is, of course, more risk when buying stocks. However, if you’re investing for at least several years and you pick an ultra-safe investment like an S&P 500 ETF, that risk is limited. Sure, you might lose some money if there’s a downturn or market crash soon after you invest. But as long as you can leave your money alone for a while, the odds of recovering your investment and making it back are high.

So, to recap. If you have money you won’t need for a while, the stock market gives you the best shot at getting better returns. And if you have money you might need soon, a high-yield savings account is the best place for it. With one, you can earn rates competitive with CDs and be able to access your cash when you need it.

There’s really no reason for most people to invest in CDs, as these other better options exist instead.

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