It pays to consider other alternatives.
- You should always keep your emergency fund in a savings account.
- CD rates, even on long-term CDs, are very low right now.
- If you have additional cash to save and want to put it in a CD, be very careful when choosing which type.
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 …….