You Won't Get Rich by Investing in CDs. Should You Put Your Money Elsewhere?
The best CDs earn you half of what the stock market offers. Find out whether you should invest in the market instead.
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Interest rates are higher than they've been in years. There's no guarantee they'll remain elevated for long -- which is what makes certificates of deposits (CDs) such popular investments right now. A CD locks in rates. Even if rates plummet overall, you get high returns for up to five years.
But there's a catch. The best CDs right now offer as much as 5.00% APY. That's over 10 times better than the current average savings account APY of 0.46%. But when you take a step back and look at alternatives, a 5.00% APY still underperforms other investment types.
Chances are, you won't get rich by investing in CDs. The question is, is 5.00% good enough, or should you put your money elsewhere?
CDs benefit retirees, short-term savings, and diversified portfolios
CDs won't make you rich, but they can lock in safe returns. Say you're a retiree with $50,000 to invest. If you put $50,000 into a 1-year CD with a 5.00% APY, you'd have $2,500 more when your CD term expires, even if rates have gone down since.
CDs are safe places to store short-term savings. The Federal Deposit Insurance Corporation (FDIC) insures most CDs for $250,000 per accountholder per bank, so the U.S. government has your back even if your bank goes bankrupt or otherwise fails.
While CDs don't earn much by themselves, it's totally reasonable to include them in a diversified portfolio. Even if you plan on investing for another 30 years, putting some of your money in a CD can provide you with peace of mind when the stock market goes wild.
Put your money in alternatives to earn the highest returns
Two profitable alternatives to certificates of deposit are the stock market and real estate.
The stock market has returned an average of 10% per year over the last 50 years. Historically, it's performed better than the highest-earning CDs today. The catch is diversified portfolios typically perform the best, and they do so over decade-long periods. It takes time to profit from stock investments.
The real estate market has offered strong historical returns. Real estate investment trusts (REITs) have returned an average of 12.7% annually from 1972 to 2023. That beats the stock market handily over 20- and 50-year periods. It's worth looking into to earn the highest returns.
CDs vs. the stock market over ten years
Let's compare CD vs. stock market returns over 10 years. Here's what you would earn:
| Investment | Initial balance | Average annual return | Final balance |
|---|---|---|---|
| CD | $10,000 | 5% | $16,486.65 |
| S&P 500 | $10,000 | 10% | $27,179.10 |
You can earn much more from the stock market than from CDs. The catch is that growth isn't steady. Some years are choppy, and you may be tempted to panic sell. Panic selling is bad; you typically lose money, and the stock market has historically recovered from losses.
If you can stomach this kind of volatility, it may be worth looking into online stock brokers. Many will let you buy stocks without paying fees. You can easily diversify your investments by tossing money into the S&P 500.
If volatility makes you queasy or stability for the short term is a priority, a CD with a high rate could be a great investment. Avoid the stock market and invest in alternatives. You'll be glad you did.
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