Is Now a Good Time to Open a CD?

Should you lock up your cash in a CD, or put it elsewhere? Here's how to know.

If the coronavirus pandemic has taught us one thing, it's the importance of having money on hand for emergencies. And while a savings account is generally an appropriate place for that cash, you may also be looking at opening a certificate of deposit, or CD.

Furthermore, you may have spare cash at your disposal beyond what you need to set aside for emergency purposes. Generally, a solid emergency fund is one with enough money to cover three to six months of essential bills. If you normally spend $3,000 a month and you have $20,000 on hand, you may not want to tuck all of that cash into a savings account, where it's apt to earn minimal interest.

The upside of opening a CD is that your money is protected (provided you don't put in more than $250,000), and you'll generally snag a higher interest rate than you will with a regular savings account. The downside is that you'll need to keep your money locked away for a preset period of time or otherwise risk being penalized several months' interest.

But is now a good time to open a CD? Or should you wait?

Today's CD rates

There's really no good way to sugarcoat it: Today's CD rates are, in a word, terrible. For a one-year CD, you might get between 0.50% and 0.60% in annual interest if you're lucky. And you may have to commit to a certain minimum deposit to snag those rates. For context, if you deposit $5,000 in a CD paying 0.50%, that gives you a mere $25 a year in interest.

Meanwhile, most of the time, committing to a longer-term CD will score you a much higher interest rate on your money -- but not today. A lot of five-year CDs today are paying around 0.80% to 0.90%. That's a horribly low rate, and so it absolutely does not make sense to tie up your money for five years if that's all you'll be getting.

In fact, a lot of high-yield savings accounts today are paying around 0.50% to 0.60% interest, which is comparable to what you'll get for a one-year CD and not too far below what a five-year CD will pay you. As such, if you're intent on keeping your money in cash (as opposed to investing it), you're better off sticking to a savings account.

Are you willing to invest?

Investing isn't something you should do blindly. But if you have extra money at your disposal, investing it could grow it into a larger sum, and the rate of return you snag on your money could well exceed what a CD will pay you. Some investment options could include:

• Stocks
• Cryptocurrency
• Real estate -- you can invest in real estate without buying actual property if you buy real estate investment trusts (REITs), which are similar to stocks

Of course, investing carries risk. When you invest your money, your principal isn't protected, whereas with a CD, it is.

But with a CD, you're also taking the risk of locking away your money at a time when interest rates are really poor. And so if you do your research, you may find that you're comfortable investing at least some of your extra cash so you can generate higher returns on it.

It pays to wait

Hopefully, there will come a point when CD rates pick back up and putting your money into a CD makes sense. But right now, there's little to be gained with a CD. So if you're not looking to invest, just keep your money in a regular old savings account. That way, you'll at least have the flexibility to access it whenever you please.