CDs are having their day in the sun. In recent months, rates on certificates of deposit have climbed above 5.00%, which is the highest they’ve been in decades. It’s understandable to see why they’ve gotten a lot of attention, as they’re a safe investment providing a pretty generous yield right now.
Don’t be fooled, though. CDs really are not a good investment for most people. Here’s why.
Your upside is limited with CDs
There’s a very simple reason why CDs are not as great of an investment as you might believe. If you invest in them, even with the best CD rates, you’re still going to max out at earning about 5.15% APY on your money.
If you took a different approach, though, you could earn a whole lot more than that with minimal additional risk. You could do that if you opened a brokerage account and put your money into an S&P 500 index fund.
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The S&P 500 has a very strong track record of earning a 10% average annual return over a very long time period. Specifically, for the last 100 years, it’s returned 10.64% (assuming dividends are reinvested).
Earning 10.46% is going to leave you a lot richer than if you invest in CDs, even at the 5.15% rates that seem so attractive right now. For simplicity’s sake, let’s compare a $10,000 investment made in 2024 in both a CD earning 5.00% and an S&P 500 fund earning 10%. The table below shows what your $10,000 would turn into over time with each investment.
| Time Since You Invested | CD | S&P 500 Index Fund |
|---|---|---|
| 5 years | $12,762.82 | $16,105.10 |
| 10 years | $16,288.95 | $25,937.42 |
| 20 years | $26,532.98 | $67,275.00 |
| 30 years | $43,219.42 | $174,494.02 |
Data source: Author’s calculations.
As you can see, you are far better off investing in an S&P 500 index fund. So, don’t be tempted to choose a CD instead of the market just because rates are high right now. The upside is still limited and you could be cheating yourself out of a lot of money if you choose the “safer” choice.
There are very few situations when CDs make sense
Now, you might be thinking that CDs are FDIC insured and less risky than the market — and you’re right. However, the key to being a successful stock investor is to have a long time horizon.
Yes, the market can crash and you can end up losing money even with an S&P fund — but if you can leave your money invested for at least a few years, that’s not likely to happen as you could wait out a market crash and then get your money back when the market recovers.
If you have such a short investing timeline that you couldn’t wait out a market crash before you’d need to withdraw your money, then putting the funds into the market wouldn’t make sense.
The reality is, CDs also require you to tie up your money. You must commit to leaving it invested for the duration of the CD term or you’ll get hit with fees. So, in most cases, if investing in the market wouldn’t make sense, buying a CD (at least a CD of the long-term variety) wouldn’t either.
For shorter terms, high-yield savings is the smarter play
It is true there are short-term CDs, including 3-month, 6-month, 9-month, and 12-month CDs. However, these are only going to guarantee you today’s great rates for a limited time. After a year or less, depending on the length of the CD, you may have few or no options remaining at 5.00% APY or higher if the Federal Reserve lowers interest rates.
High-yield savings accounts are offering rates above 5.00% right now too, and while those rates can fall any time if the Federal Reserve drops rates, the Fed is projecting at most one rate cut this year and a few next year. So, the competitive yields on high-yield savings accounts probably are going to be around for at least three to six more months, and maybe longer. Why lock your money up in a CD when you can probably get the same rate, for the same time duration, from a savings account?
For most people, it doesn’t make sense to buy a CD with money that should be in a high-yield savings account or brokerage account instead. The fact rates are above 5.00% doesn’t change this objective fact — so don’t be tricked into making a bad choice for your money.
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