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The savings account at your local bank probably earns around 0.5% interest right now. Even the聽best national banks at the moment聽earn only around 0.85% in interest.

By comparison, rates on CDs look pretty good. You can find聽five year CDs聽with rates around 1.80% if you search around.

A quick note for new readers: A CD is short for a 鈥渃ertificate of deposit,鈥� which is essentially a special type of savings offered by a bank. It usually offers a better interest rate than a normal savings account, but you have to agree to not take your money out for a certain period of time 鈥� the term 鈥� or else you鈥檙e faced with a stiff penalty.

If you have $1,000 in the bank, 0.85% annual interest will leave you with $1,043.29 after five years, whereas a five-year CD at 1.8% will give you $1,093.30 after five years. That鈥檚 $50 more for every $1,000 you invest and they鈥檙e both equally stable.聽

So鈥� why not get a CD?

Right now, I have no money at all in CDs and I won鈥檛 for quite a while. I don鈥檛 feel that earning an extra fraction of a percent in interest is worth all the drawbacks. Here鈥檚 why.

贵颈谤蝉迟,听I can鈥檛 withdraw the money if I need it without incurring a stiff penalty.聽CD policies vary, but usually it amounts to six or nine months of interest on the CD vanishing if I were to withdraw early.

So, if I were to need the money before that mark, I鈥檇 lose much of what I鈥檇 gained by using a CD. In fact, if I use the money before the six or nine month mark, I鈥檇 actually lose money overall because the fee would be greater than the interest I had earned.

The only way to get ahead with a CD is to literally not touch the money for years.

厂别肠辞苍诲,听you have to get a long term CD in order to have a rate that鈥檚 noticeably higher than savings accounts.聽One or two year CDs have interest rates that are only tiny fractions of a percent higher than a savings account.

Let鈥檚 say, for example, that I鈥檓 comparing a 0.5% savings account and a 0.75% one year CD. I have $1,000 to save. Over the course of that year 鈥� when I鈥檓 unable to touch that money 鈥� the CD is only earning me $2.50 more than the savings account.

罢丑颈谤诲,听if I get a long-term CD right now, will I still be happy with earning only 1.5% or something in 2017?聽Probably not.

The rates on CDs and savings accounts are largely聽based on the federal funds rate, which is a number set by the Federal Reserve (when you hear about 鈥渢he Fed鈥� and changing rates on the news, this is what they鈥檙e usually talking about). Right now, that rate is at 0 to 0.25%, which is basically as low as it can be. Banks only offer a little more than that.

Seven or eight years ago, that rate was around 4% and we saw banks offering interest rates as high as 5% or 6% on savings and even as high as 7% or 8% on CDs.

There are some reasons to buy CDs if the gap between savings accounts and CDs gets high enough, such as CD laddering, but you鈥檇 want at least a 1% difference between your savings rate and your CD rate.

Aside from that, the only reason to ever buy a long-term CD is if it鈥檚 high enough that you鈥檙e going to be happy with the return in four or five years. Since, right now, rates have pretty much nowhere to go but up, if you buy a long term one now, you鈥檙e going to just regret it later. Even if everything goes perfect for you, you鈥檝e just barely beaten a savings account and you鈥檝e had to lock up your money for that period.

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