Is Now a Good Time to Open a CD?

Should you put money into a CD, or keep your savings elsewhere?

The best place to put your emergency fund money is generally a savings account. While you could put that money into a CD (certificate of deposit) instead, that requires that you commit to locking your savings away for a time. And if you cash out a CD early, there are penalties.

But what about money you want to save beyond your emergency fund? If you're not ready to invest, a CD can be a good choice. Normally, a CD gives you a higher interest rate than a savings account does. You don't risk losing money with a CD, as you do if you invest in the stock market (though investing can also generate higher returns).

While a CD is often a smart place to put your money, right now, it's not a great option.

Why CDs aren't a great bet right now

CDs aren't paying. Well, they're paying, but they're not paying a lot.

Interest rates are down across the board, and most six-month and one-year CDs are paying interest comparable to that of a high-yield savings account. And even longer-term CDs are paying minimal interest -- some of The Ascent's top CD picks are well below the 1% mark for a five-year CD. When rates are that low, you don't want to commit to locking your money away for years.

Since CDs are much more restrictive than savings accounts, the benefit of opening one is scoring a higher interest rate. But if you can get an interest rate of 0.5% in a high-yield savings account and 0.6% in a one-year CD, there's no point in limiting yourself for that slight difference. For a $5,000 deposit, the difference between 0.5% and 0.6% (rates you can get today) is $5 in interest.

Where to put your extra money

If you're absolutely certain you won't need the money you lock away in a one-year CD for at least that long, you could decide an extra $5 is better than no extra money at all. But generally speaking, a few extra dollars in interest isn't worth the restrictions of a CD. You might as well leave your money in a savings account, where you can access it any time. In fact, given that the U.S. economy is still on shaky ground, it's easy to argue that a savings account is a better place for your cash right now.

You don't have to choose between a savings account and a CD. If you have extra money to put to work, consider opening a brokerage account and buying stocks -- just be sure you know the risks. Also, you could divert more money to an IRA or 401(k), though it means locking it away until you retire. That's not a bad thing, since you need savings for expenses when you're older. Just know that you're penalized for withdrawals from IRAs and 401(k)s before you're 59 ½, so if you hesitate to commit to a five-year CD, a retirement account may not be your best choice right now.

When CD rates are much more generous than savings account rates, CDs make sense. Right now, that's not the case, so consider holding off on a CD until rates get more attractive.