3 Reasons Not to Open a 12-Month CD This November — Even Though They’re Paying Over 4%

If you’re bummed out by the fact that 5% CDs are basically a thing of the past, you’re not alone. It’s disappointing to see CD rates fall, even though falling rates also mean less expensive borrowing.

The good news, though, is that you can still snag a 12-month CD at over 4% — at least for the time being. The Federal Reserve is supposed to continue making interest rate cuts, so today’s rates may be short-lived.

But for now, if you look around, you might have a pretty easy time finding a 12-month CD that pays upward of 4%. You can check out this list of the best CD rates for more options.

That said, opening a 12-month CD may not be the best move this month. Here are some reasons why.

1. You’re planning to buy a home or car soon

Since the Fed is expected to keep cutting interest rates, it could end up being cheaper to sign a mortgage or finance a car in the new year. For this reason, you may want to hold off on tying up your money in a CD.

You may end up needing that money for a down payment on a home or vehicle. And it would be a shame to have to put off a purchase like that because your money isn’t available to you without a penalty.

2. A longer-term CD may be a better fit for your needs

You’ll generally find a better interest rate on a 12-month CD today than a longer-term CD, like 36, 48, or 60 months. Banks are anticipating further rate cuts from the Fed, so they’re being more cautious with their longer-term CD rates.

But while a 12-month CD might give you a higher interest rate than a longer-term CD initially, all told, you might earn more money on a longer-term CD. If you’re saving for a goal that’s a few years out, you may want to consider a term beyond 12 months.

Say you can get 4.5% on a 12-month CD, and only 3.75% on a 36-month CD. The 36-month CD might seem like a worse deal. But if CD rates fall a lot in the new year, by the time your 12-month CD renews, perhaps the best rate you can get is 2.5%. In that case, you could end up kicking yourself for not locking in 3.75% instead.

3. A stock portfolio might pay you a lot more

The idea of earning more than 4% from a CD might seem appealing. But you may be able to do a lot better by investing your money in stocks. Over the past 50 years, the S&P 500’s average annual return has been 10%. This accounts for years when stock values soared and years when they declined.

Say you’re thinking of opening a $5,000 CD with a 12-month term. If you snag a 4.5% APY, you’re looking at $225 in interest. But beyond that point, who knows what you’ll earn on that money.

On the other hand, if you put $5,000 into a stock portfolio that gives you a 10% yearly return, in 25 years, you’ll be sitting on about $54,000. If you like the idea of that, then instead of opening a 12-month CD this month, or any CD, open a brokerage account and start putting your money to work.

Opening a 12-month CD this November isn’t necessarily a poor choice. But for these reasons, you may want to go an alternative route.