ContributorsPublishersAdvertisers

This May Be the Worst Place to Put Your Money Right Now

The Motley Fool
The Motley Fool
 2022-01-23

https://img.particlenews.com/image.php?url=1kiDtl_0dtQM8X000

Image source: Getty Images

Any money you've saved for emergencies should go into a savings account and stay there. That way, you'll have access to that cash when you need it.

But what if you have extra money you don't need for emergency purposes, but you're also not ready to invest? It may be that you're saving up to buy a home over the next five years. Investing that money isn't the best move, because if stock values fall, you're not leaving yourself with all that much time to recover. At the same time, you may not want to limit yourself to the minimal interest a savings account will pay on your home's down payment .

In this situation, a certificate of deposit (CD) could be a reasonable compromise. CDs typically pay higher interest rates than savings accounts do, and they offer the benefit of ensuring you won't lose your principal deposit (whereas if you invest that money, you could take losses if stock values tank).

But if you're going to open a CD right now, you should absolutely stick to a short-term CD. In fact, opening a long-term CD is one of the worst financial mistakes you can make today.

Why it pays to steer clear of long-term CDs

There's a reason CDs commonly offer higher interest rates than savings accounts. In exchange, they require you to lock your money away for a predetermined period of time.

Usually, the longer the term of your CD, the higher an interest rate you'll be eligible for. This holds true today as well.

One thing you should know is that today's long-term CD rates really aren't much to write home about. In fact, if you sign up for a five-year CD today, you may not get much more than 1% interest on your money. And that's just not worth it.

Right now, CD rates, like savings account rates, are at a low. And so there's no sense in locking yourself into a longer-term CD, because chances are, rates will rise over the next few years to more attractive levels. But if you sign up for a five-year CD at 1%, you may get stuck earning minimal interest for years -- unless you cash out your CD early at a penalty and lose money that way.

Stick to short-term CDs

If you're going to open a CD right now, it's a good idea to limit yourself to a one-year CD, and nothing longer. That said, today's one-year CDs aren't paying much more interest than what a savings account might give you. And so for that minimal difference, you may be better off just sticking to a regular savings account and giving yourself more options and flexibility with your money.

When interest rates are higher, opening CDs makes a lot of sense, especially in situations where you don't expect to need your cash right away but you don't want to take the risk of investing it. But right now, interest rates are so low across the board that CDs have largely lost their appeal, even on a short-term basis.

These savings accounts are FDIC insured and can earn you 8x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 8x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .

Comments / 0

Comments / 0