Why I Still Won’t Touch A 5 Year Old CD With A 10 Foot Pole
If you have money set aside for expenses or emergencies, this money should be kept hidden in a savings account. That way you’ll have pretty much instant access to that money, and you won’t have to worry about losing the principal for making a withdrawal at the wrong time – something you do you have to worry about when investing in a brokerage account.
But if you have cash in hand that you don’t plan to use for years and don’t need for emergency savings, you might be inclined to try to get a better deal. return on that money than what a savings account will give you. . And for this purpose, you might consider opening a certificate of deposit or CD.
A shorter term CD might not be such a bad choice right now. But here’s why I would advise anyone to avoid a longer term CD.
Don’t hold back your money’s growth
CDs come with different terms, i.e. different lengths of time that you agree to lock up your money for. Most banks offer a 6-month CD, a 1-year CD, and a 5-year CD, among other choices.
If you put your money in a 6 month CD, you might get a slightly higher interest rate than your savings account will pay. The same could be true for a one year old CD.
If you open a 5-year CD, you’ll likely get a significantly higher interest rate than what your savings account offers. And as interest rates rise this year in response to hikes by the Federal Reserve, longer-term CDs could end up paying even more generously than they do today.
Despite this, I would advise anyone with extra cash to avoid a 5 year CD. For one thing, interest rates have started to rise recently, but they have the potential to rise further. If you lock yourself into a longer-term CD, you could end up stuck with a lower interest rate on your money for a long time. And while you can always cash in your CD early in this case, it usually means being penalized up to several months in interest.
Second, if you have money that you don’t think you’ll need for five years, it pays to invest it in a brokerage account rather than keeping it on a CD. Although you take on more risk by investing, you could also earn significantly higher returns—returns that bring you closer to achieving your financial goals.
What if you’re super risk averse?
If you’re not comfortable taking risks, you might be inclined to favor a 5-year CD over a brokerage account, where you could lose money. But keep in mind that locking your money in a 5-year CD presents another risk: you’ll lose growth opportunities and put yourself in a position where your savings can’t keep up with inflation. It’s really a risk you don’t want to take, so I would say it makes sense to stick to short-term CDs or stay away from the CD period.
These savings accounts are FDIC insured and could earn you up to 12 times your bank
Many people miss out on guaranteed returns because their money languishes in a big bank savings account earning almost no interest. Our choices of best online savings accounts can earn you more than 12 times the national average savings account rate. Click here to check out the top picks that landed a spot on our list of the best savings accounts for 2022.
We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.