4 Signs You Shouldn't Open a CD, Even With Rates at 5%

Much has been written about the historically high annual percentage yield (APY) available on some of today's CDs, and they are indeed remarkable. CDs are a great place to invest money you're not going to need right away and watch that money grow without any effort on your part.

However, as wonderful as CDs are, they're not right for everyone. If any of the following signs apply to you, now is probably not the right time to open a CD -- no matter how attractive the rates may be.

1. You don't have a definite plan

Let's say you look at your checking account and realize you have enough money to cover three months' worth of bills. In other words, you have more money than you need to cover everyday expenses languishing in an account that earns no interest, and you want to do something about it.

While a CD provides a great opportunity to earn money with almost no effort, it's only right for those who plan to let the money ride for a specific amount of time. CDs are typically available with terms from three months to five years. Rates vary dramatically by bank and the term chosen, but imagine that you find an 18-month CD with a fantastic rate.

Our Picks for the Best High-Yield Savings Accounts of 2024

Product	APY	Min. to Earn
American Express® High Yield Savings Member FDIC. APY 3.80% Rate info 3.80% annual percentage yield as of January 10, 2025. Terms apply. Min. to earn $0 Open Account for American Express® High Yield Savings On American Express's Secure Website. Member FDIC.	3.80% Rate info 3.80% annual percentage yield as of January 10, 2025. Terms apply.	$0	Open Account for American Express® High Yield Savings On American Express's Secure Website.
Capital One 360 Performance Savings Member FDIC. APY 3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.	$0	Open Account for Capital One 360 Performance Savings On Capital One's Secure Website.
Western Alliance Bank High-Yield Savings Premier Member FDIC. APY 4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website. Member FDIC.	4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	$500 to open, $0.01 for max APY	Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website.

The only problem is you haven't taken the time to decide if there's any chance you're going to need that cash before the 18-month term expires. What if your car breaks down or your dog breaks its leg and needs emergency surgery? Do you have enough money tucked away in an emergency savings account to cover those unexpected expenses, or will you be forced to withdraw the funds from your newly invested CD?

If you don't have money put away for an emergency, you may not want to commit funds to an account that will ding you for an early withdrawal.

2. The idea of paying a penalty makes you a little sick

Withdrawing your money before a CD term expires typically results in a penalty. In fact, depending on when you withdraw the money, you could end up losing all the interest you hoped to gain, and maybe even some of your principal if you haven't earned enough to cover the penalty.

You must be able to put the money into a CD and forget about it until it's time to either cash it out or roll it over into another CD. Otherwise, a great APY means nothing.

3. You haven't accounted for inflation

As mentioned, some banks offer CDs with a 5-year term. What's so attractive about a 5-year CD is the knowledge that you're promised a guaranteed APY. No matter what happens with your other investment accounts or the economy as a whole, you know how much money you will have earned at the end of the five-year term.

Here's the problem with that: Periodic inflation is a natural part of the economic cycle. As much as we love to whine about the high cost of items today, inflation has always been present. Sometimes it's up, and sometimes it's down. However, when it's up, even the best-paying CDs may not be able to keep pace.

If you haven't accounted for inflation, the time to do so is before you choose a CD term. The longer you lock yourself in, the higher the chance of the economy hitting another inflationary bubble while your money is tied up in that CD.

4. You have access to better options

CDs have many advantages, including dependability. However, they may not be able to compete with riskier investment options like stocks. The average annual return on the S&P 500 over the past 15 years has been 12.6%, while the Dow Jones Industrial Average return has been 10.7%. Over the same period, the Nasdaq Composite has enjoyed an annual return of 16.4%.

Although investing in the market -- whether on your own by purchasing individual stocks, collectively by investing in a mutual fund, or by contributing to your company's retirement plan -- doesn't guarantee that your money will grow, it does have history on its side. Between 1921 and 1972, the annual nominal return on S&P 500 investments was 9.4%.

While no one can predict when the market will have a down year and when it will be back up, the average returns over time have been impressive. If you're planning for further in the future and want your money to grow at the fastest possible rate, it pays to explore your investment opportunities before putting funds in a CD.

When it comes to money, the decisions are 100% yours to make. Ultimately, you're the only one who can determine whether you have better options and how much risk you're willing to take.