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 |
Data source: Author's calculations.
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.
FAQs
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.
What is the biggest negative of putting your money in a CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
Are money CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Can you ever lose money in a CD? ›
Key Takeaways
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 6 months | 2.53% | $127.17 |
| 1 year | 2.57% | $260.05 |
| 18 months | 2.18% | $332.10 |
| 2 years | 2.09% | $426.48 |
3 more rowsAug 8, 2024
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
Should I put a million dollars in a CD? ›
Bottom Line. CDs can be a safe way to earn a little interest on your savings over a set period of time. But don't put more money in CDs than you can afford to lose access to for the length of the CD's term. Once your money is in a CD, you generally can't touch it without penalty until it matures.
What happens to CDs if the economy crashes? ›
According to the Federal Deposit Insurance Corporation (FDIC), the independent government agency that protects funds deposited in banks, no one has ever lost a single cent invested in CDs it backs. Even if a financial institution is forced to close its doors, your money is safe up to the insured limit.
Why would you not invest in CDs? ›
APYs are subject to change at any time without notice. There are better investments than CDs that offer higher rates. There's no tax benefits associated with buying CDs. You must give up access to your money if you buy a CD.
Should I move my money to CDs? ›
While CDs can provide some guaranteed returns over time and some level of security, they're not likely to provide you the returns needed to build wealth for retirement over time. Instead, it might make more sense to build wealth with other assets and only use CDs for a portion of your portfolio.
You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Are CDs 100% safe? ›
Safety. Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That's because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you're covered in case the bank shuts down or goes out of business.
Where is the best place to park money in a recession? ›
Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate you agreed to when you opened the account. And if you take your money out before a CD matures, you'll pay a penalty -- typically three months of interest.
What are the bad things about CD? ›
Here are some of the key downsides to know before opening CDs to save money.
- Accessibility. ...
- Early Withdrawal Penalties. ...
- Interest Rate Risk. ...
- Inflation Risk. ...
- Lower Returns.
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
