Analysis

This Is the Worst Type of CD to Open Right Now

With certificate of deposit (CD) rates beginning their long-awaited descent, many people are rushing to lock in a high annual percentage yield (APY) while they still can. Today’s rates could earn you hundreds of dollars in as little as a year, but that comes at a price.

That price is enough to keep a lot of people from ever opening one of these accounts. But if you’re thinking of giving CD investing a shot, there’s one type you definitely ought to steer clear of.

The price you pay when opening a CD

CDs promise guaranteed profits with no monthly maintenance fees, but they make your money virtually untouchable during the CD term. This could be anywhere from a few months to a few years.

You’re technically able to withdraw your cash whenever you want. But you must take it all out in a lump sum, and an early withdrawal typically triggers a penalty equal to several months of interest payments. It’s possible to lose some of your principal this way if you change your mind shortly after opening the CD.

Long-term CDs — those with terms of over a year — generally have the highest earning potential, but that’s a long time to give up control of your cash. It could prove problematic if unexpected costs arise. You might be forced to accept the early withdrawal penalty to get the money you need unless you have a separate emergency fund.

They’re not always good investments

Even if you can leave your cash alone for the entire term, you could still short-change yourself. The best 5-year CD rates right now are close to 4.00%. That could make you $221 on a $1,000 initial deposit. But if you’d invested that $1,000 and it earned a 10% average annual return, it’d be worth $1,611 after five years.

Also, we have no way of knowing what CD interest rates will look like in a few months, let alone a few years. It’s reasonable to assume they’ll go down at some point since they’re high right now. That’s why many see now as a good time to lock in a high rate.

But that’s also what makes long-term CDs such a bad investment for most people most of the time. There’s always a chance that rates could increase down the road. If you lock in a lower rate now, you’re stuck there until the CD term ends unless you pay the early withdrawal penalty.

Forget long-term CDs: Try these instead

Rather than tie up your cash for years, consider putting your cash in one of these accounts.

High-yield savings account

The top high-yield savings accounts have interest rates close to 5.00% right now, and they don’t prevent you from withdrawing your cash like CDs do. But their interest rates aren’t locked in. When they dip, your monthly interest payments will be lower. However, they can also climb when bank interest rates go up.

Short-term CD

Short-term CDs typically have lower APYs than long-term CDs, but that’s not what we’re seeing now. The best CD rates today come with CDs with 1-year terms.; these are still hanging around 5.00%. That’s enough to earn you $51 on a $1,000 initial balance. Plus, your money won’t be tied up for as long.

CD ladder

A CD ladder is where you split your money between CDs of different lengths — for example, a 1-year CD, a 2-year CD, and a 3-year CD. When the term ends on your first CD, you can either spend the cash, move it to a savings account, or invest it in a new CD. Then, you do the same thing with each of your other CDs as they mature.

This gives you access to some of your cash every year. It also gives you plenty of chances to shop around for the best CD rates at the moment, so there’s a smaller chance of short-changing yourself than there would be if you sunk all your cash in one long-term CD.

You can also spread your money around between several of these options if you prefer. Think about what matters most to you — a high interest rate or easy access — and let this guide your decision.

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

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