Smart Investors Are Avoiding 12-Month CDs, Even With Rates at 5%. Here's Why

When choosing a bank account like a savings account or a certificate of deposit (CD), most people head straight for the highest interest rate they can find. It's not difficult to follow their logic: Higher interest rates often lead to more money for you.

But it's not always that simple, especially when you're talking about CDs, which require you to lock your money away for months or even years. The best investors know that. That's why they're staying away from short-term CDs, even though they promise the highest interest rates right now. Here's why and where you should put your money instead.

Interest rates aren't the only important factor

How much you earn in interest depends on the interest rate and how long you invest your money for. Say you have a choice between a 6-month CD or a 12-month CD, both with 5.00% APYs. If you invest $10,000, you'd earn about $247 with the 6-month CD and $500 with the 12-month CD. No big surprises there: If you invest your money for longer, you'll get a larger return.

However, you also have to tie your money up for longer. That's why most banks typically offer higher rates on long-term CDs to incentivize customers to pick a longer term. That's not the case lately, though. High inflation has driven up short-term CD rates faster than long-term CD rates, and that's left some people scratching their heads about where to invest.

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 December 28, 2024. 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 December 28, 2024. 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 4.46% Rate info The annual percentage yield (APY) is accurate as of November 7, 2024 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.	4.46% Rate info The annual percentage yield (APY) is accurate as of November 7, 2024 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 answer lies in what we expect CD rates to do going forward. With inflation cooling, they're beginning to decline. That means future CDs will likely pay less interest. If you hope to invest for a few years, locking in a short-term CD right now could hurt you in the long run.

For example, say you have $10,000 you want to keep in CDs for three years. You're deciding between three 1-year CDs and one 3-year CD. The 1-year CD offers a 5.00% APY right now while the 3-year CD only offers a 4.00% APY. But when you open your second 1-year CD, the rate has dropped to 3.50%. And by the time you open your third, it's down to 2.00% APY. The table below illustrates how much your balance would be at the end of each year with each option:

By locking in a high rate for a longer period, you come out ahead compared to three short-term CDs, even though the initial 1-year CD has a higher APY. In our example, the difference is pretty small. But if you invested a larger sum or over a longer time period, the single long-term CD would come out ahead by a larger margin.

Where to keep your money instead

The best place for your money right now depends on the level of risk you're comfortable taking and when you plan to use it. If you're determined to invest in CDs, medium to long terms are better bets than short terms as long as you're comfortable giving up access to your money for that amount of time. Check out this curated list of some of the best CDs our experts recommend now.

But CDs could be too risky or too conservative in some situations. It's too risky for your emergency fund or savings you plan to spend before the CD term is up. You need a high-yield savings account for that. We have a list for that too. Click here to check out the top high-yield savings accounts paying 4.00% APY (or higher) right now.

On the other hand, if you're investing over a long time horizon -- seven or more years from now -- you're much better off investing your money in the stock market if you're comfortable doing so. There's a risk of loss associated with this, but you could also gain far more than you could with even the best CD rates.