CD Rates Are Over 5% -- and I Still Think They're a Waste of Money

Certificates of deposit (CDs) are getting lots of attention right now, mainly because many have annual percentage yields (APYs) above 5.00%. That's an impressive rate, but I still don't think they're a great place for my money.

Here's why I won't be opening a CD anytime soon, plus a couple of alternatives I think are a much better option for my money.

1. CDs are too restrictive

My biggest annoyance with CDs is the restrictions involved. When you put your money into a CD, you must leave it there for the entire term to earn the full interest. If you take it out early, you pay a penalty fee.

The fee is usually three months of simple interest for CDs with term lengths of two years or less. The fee jumps to six months of simple interest for CDs with longer terms.

I've had to pay for too many unexpected car and house repairs to have my money locked up. I want easy access to my cash to cover expenses when they inevitably pop up.

2. A savings account is a better option

Many people might argue that high CD yields offset the downside of having your money tied up for months or years. But you can often get the same impressive interest rates in a high-yield savings account.

Many savings accounts are paying 5.00% APYs or higher right now, and they don't have the same term length restrictions as CDs. You could earn a high yield with a savings account and not worry about paying a fee if you have to withdraw money to cover an emergency expense.

It's important to note that savings account yields are variable and can change at any time, while CD rates are guaranteed as long as you leave your money in the account for the entire term. But I'm comfortable with that tradeoff to avoid tying up my money for too long.

3. I can make more money investing in stocks

I'm still plenty of years away from retirement, so I want any extra money I have to earn the largest returns possible. Even with many CD rates at 5.00%, they don't compare to investing in stocks.

For example, many low-cost index funds that track the S&P 500 experienced gains of nearly 30% over the past two years, including dividends. That puts CD rates of 5.00% to shame.

I know there are no guaranteed returns when investing in stocks, and you can certainly lose money. But I've got a long investment time horizon right now, so I'll ride out any significant dips in the market and wait for it to rebound.

The stock market's historic annual rate of return is 10.2%, so there's a good chance that remaining patient with stock investments will result in a return that far outpaces a CD's returns.

I'm not a fan of CDs personally, but I understand why they might appeal to some people. If you're retired or near retirement, putting cash into a CD to earn interest that outpaces the inflation rate makes sense. But if you aren't nearing retirement or just want easy access to your money, there are better options than a CD.