Here's Why I Wouldn't Open a 5-Year CD

Years back, I built myself an emergency fund that's come in handy over the years. And that emergency fund is tucked away in my savings account so I have access to that money whenever I need it.

But I also have some money in the bank that isn't earmarked for my emergency fund. I have cash I'm not quite ready to invest, but I don't want to keep parked in a savings account. The money of mine that falls into that category often goes into a CD, where I can commonly snag a higher interest rate on it than what my savings account will pay me.

But while I'm a fan of opening shorter-term CDs -- namely, 12 months or fewer -- I'm really not a big fan of opening longer-term CDs. And so while my bank offers a five-year CD, I won't take advantage of it for two reasons.

1. It's a lengthy commitment

I'm comfortable locking my money up in a CD for 12 months or less because I usually have a pretty good sense of my near-term financial needs and objectives. But frankly, I have no idea what my situation will look like in five years. And I'm not willing to commit to a five-year CD that will penalize me for cashing out my money sooner. 

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To be clear, any time you cash out a CD early, you risk a penalty. But I feel that I'm more likely to end up needing to cash out a five-year CD early than, say, a one-year or six-month CD. And I'm not willing to take that risk.

2. There's not enough financial upside

I do most of my personal banking at Capital One, and right now, you can score a 4.20% APY on a one-year CD and 3.70% on a two-year CD. That's more than what my savings account is paying me. 

However, the interest rate being offered by Capital One on a five-year CD is 3.50%. That's less than what a one- or two-year CD is paying, and it's less than what I'm getting from my savings. In light of that, I don't feel that it's wise for me to commit to that rate.

Now, if you're wondering why the rate on a longer-term CD would be lower than the rate for a shorter-term one, the answer is simple. CD rates are very high right now, historically speaking, and the reason they're at these levels is due largely to the interest rate hikes the Federal Reserve has implemented over the past year and change. 

But there's a good chance the Fed will cut rates over the next five years, leading to lower interest rates on all banking products. So banks are accounting for that when establishing their longer-term CD rates.

Of course, I could shop around at different banks to see what rates they're offering. But in reality, I don't think it's going to change things. I don't see there being enough financial upside to get me to make a five-year commitment with a chunk of my money.

All told, CDs can be a useful financial product, and I've certainly opened my fair share in the past. But while I'm on board with the idea of opening a shorter-term CD, the idea of a five-year CD just doesn't appeal to me.