These Are the Only 2 Reasons I'd Ever Open a CD

Some people treat CDs as if they're a sure bet for everyone. They're not.

CDs are safe, because they're FDIC-insured and their interest rates are fixed. You're guaranteed to make money, as long as you don't cash out early.

Yet CDs only make sense in certain situations. Here's when I'd consider opening one -- and why I'd skip it otherwise.

1. When I'm saving for a specific near-term goal

Let's say you plan to buy a home in three years, or you know you'll need $20,000 for a wedding or tuition payment. That's when a CD shines.

CDs lock in your money for a set term, typically between three months and five years. The interest rate is fixed for the whole term, but if you withdraw your money early, you'll pay a penalty. That means they help protect your savings from temptation and market volatility.

If you're sure you won't need the cash before the CD matures, it can be a smarter choice than a savings account, whose rate can change at any time. You may earn a higher APY, and you'll also be protected from interest rate cuts -- and more of those are expected soon.

Just be sure to compare the best CD rates before you commit.

2. When I'm near (and in) retirement

CDs also make sense later in life, when you want to shift from growing your wealth to preserving it. Once you're within about five years of retirement, stock market drops can do major, potentially permanent, damage to your savings (this is called "sequence risk").

That's why people who are near retirement (or retired) may want to move some money into safe assets like CDs. You can use CDs for the cash you'll need within the next few years, while the rest of your portfolio can stay invested for long-term growth.

Why I don't use CDs for anything else

Beyond those two cases, I don't see much use for CDs. Here's how I divide my money instead:

• Emergency fund: I keep six months' worth of expenses in a high-yield savings account (HYSA). Having instant access to that money matters more than a little extra interest.
• Long-term growth: Everything else goes into my 401(k) and Roth IRA, and about 90% of that money is invested in stock funds. Over decades, that's how you build real wealth.

CDs fall in the middle: too restrictive for emergencies, too conservative for long-term growth. They can be great tools when you know you'll need the money soon, or when you need to reduce your risk. But if your time horizon is five years or more, you'll almost always come out ahead by investing.

Where to put your money instead