Most people think that opening a CD is a risk-free investment. You can put money in a CD, purchase FDIC insurance from the bank, and earn a guaranteed fixed APY for the length of the term. There’s no risk of losing money on a CD, right? GOOD…

The truth about CDs is more complicated. CDs carry a significant hidden risk that many people may not realize. But unless you pay attention, most CDs aren’t exactly “risk-free.”

Let’s look at the biggest hidden risk of CDs and what you might want to do with your savings instead.

The Biggest Risk of CDs: Early Withdrawal Penalties

The biggest problem with CDs, and the reason I don’t personally use CDs for my savings, is that CDs require you to lock up your money. When you open a CD, you must agree to keep your money in that CD for a set period of time, whether that’s three months or five years. And yes, you benefit from a guaranteed interest rate for this period, but CDs have a big disadvantage: early withdrawal penalties.

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

American Express® High Yield Savings APY 3.90% Pricing information Annual percentage yield of 3.90% as of December 2, 2024. Conditions apply. Member of the FDIC.	APY 3.90% Pricing information Annual percentage yield of 3.90% as of December 2, 2024. Conditions apply.	Min. earn $0
Capital One 360 ​​Performance Savings APY 3.90% 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 November 21, 2024. Rates are subject to change at any time before or after account opening. Member of the FDIC.	APY 3.90% 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 November 21, 2024. Rates are subject to change at any time before or after account opening.	Min. earn $0
Western Alliance Bank High Yield Savings Premier APY 4.46% Pricing information Annual Percentage Yield (APY) is accurate as of November 7, 2024 and is subject to change at the Bank’s discretion. Refer to the product website for the latest APY rate. The minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. earn $500 to open, $0.01 for maximum APY Member of the FDIC.	APY 4.46% Pricing information Annual Percentage Yield (APY) is accurate as of November 7, 2024 and is subject to change at the Bank’s discretion. Refer to the product website for the latest APY rate. The minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	Min. earn $500 to open, $0.01 for maximum APY

You are charged this fee when you decide to withdraw money from the CD before the end of the agreed term. The exact details vary depending on the bank and the term of the CD, but early withdrawal penalties require you to give up some (or all) of the interest you’ve earned.

The penalty amount could be (for example) 90 days interest on a 6 month CD, or 180 days interest on a 1 year CD – each bank sets its own rules for withdrawal penalties anticipated.

Do you want more flexibility with your cash savings, without worrying about penalties? The best savings accounts let you keep every dollar of interest you earn. Click here to learn more about the best high-yield savings accounts (with 4.20% APY or higher) — and see why they may be a better bang for your buck than CDs.

Yes, you can lose money on a CD

Early withdrawal penalties don’t just pose a threat to the interest you earn on a CD. These penalties could also cause you to lose part of your initial deposit (capital).

For example, let’s say you open a 12-month CD with an early withdrawal penalty of 90 days of interest. And let’s say that just two months after opening the CD, you experience a financial emergency and suddenly have to remove the CD. The early withdrawal penalty will eat up more than the amount of interest you earned: two months’ worth of interest, and you’ll lose an additional month’s worth of interest on your original principal balance.

No savings account or money market account will cause you to lose money this way. These other accounts pay high APYs (competitive with top CDs) and give you more flexibility in accessing your money.

Who should open a CD? People with a lot of money

Because of these costly risks, most people should not use CDs unless they have a sufficient emergency fund (such as three to six months of expenses). If you have enough non-emergency money in the bank, you benefit from strong job security, rock-solid financial stability, no big expenses on the horizon and you are 100% sure that you will not need to withdraw money. the CD earlier than expected, then fine, open a CD.

But most Americans don’t have a lot of money. Most Americans may need access to their savings sooner than they think. According to research from Motley Fool Money, the typical American has $8,000 in cash in the bank.

Instead of opening a CD, most people would be better off with the best savings or money market accounts. Even though the APY on a savings or money market account is lower than CDs, the flexibility and lack of early withdrawal penalties make it worth it.

Conclusion

People need to start thinking differently about the hidden risks of CD early withdrawal penalties and how much they can really cost savers. Because of the possible hidden cost of early withdrawal penalties, even the best CDs are not truly “risk-free.”

Unless you have a lot of money, unless you are 100% sure that you can leave your CD deposit alone for the entire term, you run the risk of earning 0% interest on your CD – or even lose money on a CD.