Certificates of deposit (CDs) simply aren’t the best choice for many people’s savings. CDs have a few advantages, such as fixed interest and FDIC insurance. But CDs also have some major drawbacks, the biggest being early withdrawal penalties.

If you have to withdraw money from the CD early, you’ll have to pay penalties that can eat up most (or all) of the interest you were hoping to earn. Because CDs are so inflexible, even with an APY of 4.00% or more, they are not suitable for many people’s financial goals.

Here are some signs that you should avoid CDs, even though the APYs are higher than savings accounts.

1. You don’t have a solid emergency fund

CDs are not a good place to store money you might need tomorrow, so don’t use CDs for your emergency savings. If you don’t already have a few months of income in an emergency fund — and many Americans don’t — you shouldn’t open a CD.

Our picks for the best high-yield savings accounts of 2024

American Express® High Yield Savings APY 4.00% Pricing information Annual percentage yield of 4.00% as of November 8, 2024 Member of the FDIC.	APY 4.00% Pricing information Annual percentage yield of 4.00% as of November 8, 2024	Min. earn $0
Capital One 360 ​​Performance Savings APY 4.00% Pricing information Check the Capital One website for the most up-to-date pricing. The Advertised Annual Percentage Yield (APY) is variable and accurate as of October 23, 2024. Rates are subject to change at any time before or after account opening. Member of the FDIC.	APY 4.00% Pricing information Check the Capital One website for the most up-to-date pricing. The Advertised Annual Percentage Yield (APY) is variable and accurate as of October 23, 2024. Rates are subject to change at any time before or after account opening.	Min. earn $0
CIT Platinum Savings APY 4.70% APY on balances of $5,000 or more Pricing information 4.70% APY on balances of $5,000 or more; otherwise, 0.25% APY Min. earn $100 to open an account, $5,000 for maximum APY Member of the FDIC.	APY 4.70% APY on balances of $5,000 or more Pricing information 4.70% APY on balances of $5,000 or more; otherwise, 0.25% APY	Min. earn $100 to open an account, $5,000 for maximum APY

If you’re still building your emergency fund, or even if you have a lot of extra non-emergency money but just don’t want to commit to a CD term, open a savings account instead high efficiency. Check out our list of the best savings accounts which offer high APYs.

High-yield savings accounts give you an easy way to grow your cash reserves faster and give you control over when and how you use your money, without penalties.

2. You save for a short-term goal

Another big problem with CDs is that they’re not the best way to grow your money if you’re saving for a specific short-term financial goal. How soon do you need the money you invest in a CD? Ask yourself if you are saving for:

• Vacation in six months
• A wedding in a year
• A new car in two years
• A down payment on a house in three years

Opening a CD isn’t always the best way to save for a short-term goal, as your plans may change. Unless you know exactly when you’ll need your funds, you may want to avoid CDs; they are too rigid for the reality of many people’s financial lives.

What happens if you find your dream home sooner than expected but can’t withdraw money from your 3-year CD without paying early withdrawal penalties? What happens if your car breaks down and you need to replace it now, not in two years?

For many short-term financial goals, it’s best to keep your money in a high-yield savings account (or money market account). Even if your savings account earns a slightly lower APY than you’d get with a CD, the flexibility and peace of mind are worth it.

3. You save for a long-term goal

CDs aren’t the best place to keep money you might need now or even soon. So what about the long-term money you’ll need later?

Here’s another problem with CDs: If you can afford to lock up your money in a CD for the long term (say, for three or five years), you may just want to invest that money in a brokerage account.

If your investment timeline is longer than three years and you’re willing to accept some investment risk, a relatively low-yielding CD is not the best place to keep your money. You could potentially earn higher returns by investing this money in a diversified portfolio of stock and bond ETFs, money market funds, and other investments.

4. You don’t have tens of thousands of dollars to spend

Ultimately, the best reason to open a CD is when you have a lot of money and don’t need it to save for retirement or invest for long-term goals. For example, CDs might be suitable for retirees who have a large amount of money because they need to earn a secure, stable fixed income.

But the typical American only has about $8,000 in cash in the bank, including savings and checking accounts. Let’s say your savings account earns an APY 1% lower than a CD: That means every $1,000 in savings earns $10 less per year. Is it worth keeping your precious cash on a CD just to get an extra $10? For most people, the answer is no.

Conclusion

Don’t worry about getting the highest return possible if it means running the risk of early withdrawal penalties. Instead, keep your money in a high-yield savings account, stay in control of your money, and continue to build your savings.