Most people think that opening a CD is a risk-free investment. You can put cash into a CD, get 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? Well… 

The truth about CDs is more complicated. CDs have a big hidden risk that a lot of people might not realize. But unless you're careful, most CDs are not truly "risk-free." 

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

CDs' biggest risk: Early withdrawal penalties 

The biggest problem with CDs, and why I don't personally use CDs for my savings, is that CDs force you to lock up your money. When you open a CD, you have to commit to keep your cash in that CD for a fixed term of time, whether it's three months or five years. And yes, you earn a guaranteed rate of interest for that time period, but CDs have one big downside: early withdrawal penalties. 

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You're charged these when you decide to take cash out of the CD before the agreed-upon term is up. The exact details vary based on the bank and the CD term, but early withdrawal penalties force you to give up some (or all) of the interest you've earned. 

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

Do you want more flexibility for 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 can be a better choice for your money than CDs. 

Yes, you can lose money on a CD

Early withdrawal penalties aren't just a threat to the interest you earn on a CD. These penalties could also cause you to lose some of your initial deposit (principal), too. 

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

No savings account or money market account will make you lose money in this way. These other accounts pay high APYs (competitive with the best CDs) and give you more flexibility to access your cash. 

Who should open a CD? People with lots of cash 

Because of these costly risks, most people shouldn't use CDs unless you have a healthy emergency fund (like three to six months of expenses). If you have plenty of non-emergency cash in the bank, you have strong job security, rock-solid financial stability, no big expenses on the horizon, and you're 100% certain that you won't need to take money out of the CD sooner than expected, then fine, open a CD. 

But most Americans don't have that much cash. Most Americans might need to access their cash savings sooner than they think. Based on Motley Fool Money research, the typical American has $8,000 of cash in the bank. 

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

Bottom line 

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 lots of money, unless you are 100% sure you can leave your CD deposit alone for the full term, you're running the risk of earning 0% interest on your CD -- or even losing money on a CD.