4 Signs You Shouldn't Open a CD Even Though Rates Are Above 5%

CD rates on some terms are currently above 5.00%. That's a great rate, considering CDs are virtually risk free. But just because rates are high doesn't make CDs the best investment for every person.

So, should you personally be putting your cash into CDs? Here are four signs that suggest you may not want to run to the bank or go online to open one just yet.

1. You don't have an emergency fund

If you don't have an emergency fund with three to six months of living expenses, you should not open a CD. You should work on building up money in an emergency fund first -- and your emergency fund should be in a high-yield savings account.

The Ascent has a long list of high-yield savings accounts offering rates as high as 5.36%. These rates are pretty competitive with what CDs are offering. And while you don't get that rate locked in, and it could fall if rates do, you get more flexibility. You can take your money out of savings whenever you want.

If you put your emergency fund into a CD, you'd be penalized if you withdrew the funds early. Depending on the CD, you could lose around three months to 180 days of interest. That's a lot. You don't want to forfeit much of your gains or be forced to leave your money in the CD when you need it for emergencies.

If you don't have three to six months of living expenses saved, start working on that today. Open a savings account now and start padding your emergency fund.

After you have your full emergency savings account, you can put extra money into CDs if you want.

2. You already have a lot of money invested into CDs

CDs are a good investment right now, but they aren't the only investment that provides solid returns with little or no risk. If you already have a lot invested in them, you may want to consider alternatives.

For example, T-bills are another option worth considering. Although they have a maximum term of 52 weeks, their rates are pretty competitive with CDs of the same term length. And they have two big advantages in that they're exempt from state income taxes and are more liquid, as they can be sold on a secondary market.

Diversification is always a good thing when it comes to your portfolio, so if you already have several CDs and are looking for another short-term or medium-term safe investment, check out this guide to CD bills versus Treasury bills to see if T-bills would be a better place for your extra cash.

3. You haven't maxed out your 401(k) match yet

If you work for a company offering a 401(k) match, those matching funds typically provide the best possible returns you can get on your investment. If your employer matches 100% of your contributions, you actually get a 100% return.

Maxing out your 401(k) match should be your top financial goal after making sure you have an emergency fund. In fact, it's worth doing, even if you have some high-interest debt. So if you haven't yet contributed enough to earn your full employer match, find a way to do that before even considering opening a CD.

4. You have a lot of high-interest debt

Finally, if you have a lot of high-interest debt, you should pay that off before investing in a CD. The average credit card interest rate right now is 21.59%. You don't need a degree in math -- or even a calculator -- to know that the return on investment of paying that off is higher than the 5.00% you could get from a CD.

If you spot any of these four signs, don't open a CD. Work on your other goals first -- like maxing out your 401(k), paying off debt, building your emergency fund, or diversifying your investment portfolio. The Ascent has tools to help with all these things, like this guide to building a solid emergency fund, so check them out and start making progress today.