CD Rates Topping 5% Could Soon Be Harder to Find. Should You Invest in Them Now?

In November of 2023, more than 3,900 certificates of deposit (CDs) were available with rates above 5.00%. By March of 2024, that number had dropped under 3,000, as reported by MarketWatch.

There's no question that CD rates on the whole have come down a bit from recent record highs, although there are still great offers out there. While it's impossible to predict the future, this trend is probably going to continue or even accelerate, as the Federal Reserve has still signaled a desire to lower interest rates this year if inflation slows.

So, should you rush to buy 5.00% CDs before they disappear? Here's what to know.

Buying a CD makes sense only in specific situations

Here's the reality: CDs are a good investment only in very specific situations. Opening one makes sense if:

• You can afford to tie up your money for as long the CD term lasts
• You don't have a long enough investing timeline that your money belongs in the stock market

If this criteria doesn't apply to you, then it doesn't matter if you lose the chance to buy a CD at 5.00% because it wasn't the right investment for you anyway.

There's been a lot of attention lately focused on buying CDs because yields have been pretty impressive -- especially considering a good rate on a CD used to be around 2.00%. But you don't want to let fear of missing out drive you to make the wrong investment choice when a CD really isn't the best option for you.

Passing up CDs is the right move if the investment isn't right for you

If you're not able to commit to investing your money for the term of the CD, it makes little or no sense to invest in it.

You'll be charged a hefty penalty if you have to withdraw the funds early, sometimes losing most or all of the interest you've earned. And if you have to take money out before you earn enough interest to cover the penalty, you could actually end up losing some of the principal you put into the CD.

On the flip side, if you have money you can invest for the long term (around five years or more), you are almost always better off opening a brokerage account and putting the money into the stock market. You can buy shares of an S&P 500 index fund that has consistently earned 10% average annual returns (double what CDs are offering right now), and take on minimal risk, since your timeline is long enough to wait out market downturns before you'd have to sell.

Now, if you happen to have money available that you can lock up for a few months or a few years, you may want to act sooner rather than later and open a CD. Rates probably aren't going to go up since the Federal Reserve is still signaling an intent to cut rates. Taking a chance by putting off your purchase would mean taking a big risk with little potential upside.

If that's your situation, check out The Ascent's guide to the best CD rates to find one that's offering a competitive yield. Consider buying it soon, unless you have a solid reason to believe the experts are wrong on which way rates will trend in the coming months.

Just be sure, though, that you're really considering whether a CD is the absolute best place for your investment dollars by thinking first about exactly how long you can afford to tie up your cash.