If You Plan to Do These 3 Things With Your Money, You Definitely Shouldn't Invest It in a CD

Certificates of deposit (CDs) can be a great alternative to investing in the stock market for those looking to grow their wealth. Money you put into a CD is protected against loss and earns a guaranteed interest rate over the CD term.

But like every financial account, it has its drawbacks, too. If you plan to use your cash for any of the following three reasons, a CD probably isn't your best option.

1. Emergency expenses

It's not a good idea to put money for emergencies in a CD because you never know when you'll need to withdraw it. Typically, you're not allowed to withdraw funds from a CD before the CD term is up. If you do, you'll pay a penalty equal to several months of interest. It's even possible to lose some of your principal if you withdraw the money shortly after depositing it.

Each bank has its own rules, though, and some do permit you to make CD withdrawals at any time. However, if you do, you'll forgo the remaining interest you would have earned had you left the money alone. Check with the bank or credit union to learn the rules for the CD you're interested in.

Generally, a high-yield savings account is a much better home for your emergency fund. These accounts still enable you to earn an above-average interest rate on your savings. Right now, the best ones offer rates around 5.00%. And you can withdraw your money penalty-free at any time.

2. Planned expenses before the CD term ends

A CD isn't a good fit if you have a planned expense coming up prior to the end of the CD term. The bank won't stop you from withdrawing this money early if that's what you want, but you'll still pay a penalty.

To avoid this, you could place just a portion of your savings in a CD and put the rest in a high-yield savings account where you can access it when you need it. You could also try a CD ladder. This is where you divide your money among CDs of different term lengths. For example, you might have a 1-, 2-, 3-, 4-, and 5-year CD with equal amounts in each.

When the 1-year CD term ends, you can either withdraw the cash if you need it or put it into a new 5-year CD. This enables you to take advantage of the higher rates long-term CDs typically offer while still giving you access to some of your cash every year.

3. Retirement savings

A CD can grow your money over time, but you probably won't earn as much with one as you could by investing that cash in a retirement account. The best CD rates right now are around 5.00%. But this is extremely high and rates won't stay forever.

Investing your savings introduces the risk of loss, but you could also gain a lot more. The S&P 500 index -- a popular stock market benchmark -- grew by more than 10% per year on average over the last 10 years. This could grow your wealth much more quickly than a CD.

If you're nearing retirement age, you might consider moving some of your savings into a CD rather than invest it in riskier stocks. But just keep enough for your near-term expenses here. You can always move more money out of your retirement accounts later.

If none of the things above apply to you, a CD could be a good home for your savings. Think about how long you're comfortable leaving your money alone. Then compare rates from top CD providers to find the one that best suits you.