Why a 4% CD Might Be the Worst Place for Your Cash

A certificate of deposit (CD) with a 4.00% APY? You might be thinking, "Sign me up!" But would you believe me if I told you it's actually a terrible place for your cash?

It's true. A 4.00% CD sounds great -- until you run the numbers on what you're giving up. Locking your cash into a fixed rate can backfire in a number of different ways. A CD still has its place, but it's not the safe, obvious win it looks like.

Here's what to know.

Rates could keep climbing

CD rates have actually been climbing, not falling. They're near decade-highs right now, and will keep increasing following the Fed's recent benchmark rate raise.

That might seem like a reason to get a CD. But if rates increase further, you'll be stuck with a lower return for months or even years. That's because a fixed-rate CD locks in today's number for the full term.

Basically, by locking in a CD, you're betting that today's rate is as good as it gets in the near future. And that's not a great bet right now.

Your money's locked up for months or years

With a CD, your money's locked up for the full CD term. That means if you take money out before it matures, the bank takes a chunk of your earnings as a penalty -- or all of them.

Even if you only invest in CDs with money you're comfortable locking up, something can change that in a hurry. A car repair, a job change, or a surprise medical bill can force your hand.

No-penalty CDs exist, but they typically pay less than standard ones, so you're trading yield for flexibility either way.

That's why a high-yield savings account (HYSA) is the better play. Your money stays safe and totally accessible, just like a standard savings account -- only you're earning a much higher APY, competitive with the best CDs (and even higher in some cases).

Even better, HYSA rates are variable and can change over time -- which is great if you think interest rates will increase in the future.

Want to learn more? Check out our list of the best high-yield savings accounts and find the one for you.

Stocks are historically much better

Over the long run, stocks have crushed what any CD has ever paid. The S&P 500 has averaged roughly 10% annually over the long haul, according to Motley Fool research. That's more than double even the best CD rates available now.

The catch here is risk. CDs are FDIC-insured up to $250,000 and can't lose value. Stocks can and do drop, sometimes for a year or two at a stretch.

But in the long run, stocks are the better play. If you won't need the money for five years or more, investing with a brokerage account is definitely the way to go.

Interested? See our full list of the best online brokerages out there now.

When a CD still makes sense

A CD earns its keep when you know exactly when you'll need the money and want zero surprises until then. Think a house down payment in 18 months, or cash set aside for taxes. For my money, that's the only scenario where locking in beats staying flexible.

Shop around using a list of some of the top CD rates available today, and match the term to your real timeline. Outside of that specific scenario, though, a savings account or a taxable brokerage account is the better choice.