Why I’m Nervous to Open a Long-Term CD Right Now

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It just feels like a risk. 

Most of the money I have earmarked for emergencies and other more near-term needs or goals is tucked away in my savings account. That way, I can access it at any time.

But I have some cash on hand that I don’t necessarily have earmarked for emergencies, but I also don’t want to invest in my brokerage account. And that’s money I may want to put into certificates of deposit, or CDs.

The upside of putting money into a CD is snagging a higher rate of return on your cash. Right now, for example, the online bank I use is giving me 3.3% interest in my savings account. With a five-year CD, I could snag 4.4% interest.

And that’s just my bank. There are other banks that are paying even higher interest rates — on both savings accounts and CDs.

But while I’m potentially interested in putting cash into a CD, I won’t choose one with a five-year term — even if I find a better rate than 4.4%. Here’s why.

I don’t want to get shortchanged

The one drawback of CDs is being forced to lock your money away for a preset period of time. If you cash out a CD before it comes due, you’ll be penalized by your bank.

Now, each bank gets to set its own penalty. But usually, you’ll lose three months of interest for cashing out a 12-month CD early. For a five-year CD, you might lose six months of interest.

The other annoying thing about cashing out a CD early is that you’ll generally face the same penalty regardless of when you cash it out. So, let’s say you put money into a five-year CD and cash out at four and a half years. You’ll generally face the same penalty you would for cashing out after a year.

Why am I talking so much about cashing out CDs? Well, let’s say you open a CD and then rates increase a few weeks later. You may be tempted to cash yours out early to avoid getting stuck with a lower interest rate. Only the penalty you face for an early cash-out might negate the higher amount of interest you stand to earn by opening a new CD with a better rate.

This is exactly why I refuse to put money into a long-term CD right now. The Federal Reserve isn’t done raising interest rates, which means banks could raise their rates in the course of the next year.

I don’t want to run the risk that rates will rise shortly after I agree to tie up my money. And I also don’t want to have to deal with penalties for cashing out a CD before it comes due.

A better approach

Right now, I can snag 4.15% annual interest on a one-year CD at my bank. So if I do move forward with a CD, that’s the term I’m likely to stick to. Tying my money up beyond that seems like too much of a risk from an interest rate perspective. And there’s no need for me to take that risk when a better option exists.

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