You Can Do Better Than CDs. Invest in This Instead

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Is now the right time to open a CD? Maybe not. See why buying this one special investment could be a better move for your extra cash. [[{“value”:”

The recent Fed rate cut in September 2024 made a lot of people wonder if now is the right time to lock in a long-term CD. But here’s the problem: CDs make you lock up your money, and they don’t earn that high of a yield. CDs’ early withdrawal penalties aren’t the best fit for most people’s emergency savings, and their low yields aren’t a good fit for longer-term investing.

If you have a decent amount of cash beyond your short-term emergency fund, what should you do with your extra cash instead of opening a CD? Think about opening a brokerage account and investing that money in a diversified portfolio of stocks, like an S&P 500 index fund.

Let’s look at how you can invest your extra cash to hopefully earn higher returns than CDs.

When to invest in stocks instead of opening a CD

Not everyone should use their extra cash to buy stocks. If you don’t already have a few months’ worth of expenses in cash in a bank account for emergencies, you should build up those short-term savings first. But many Americans might have extra cash sitting on the sidelines.

If you don’t need your cash for immediate emergencies or short-term financial goals like buying a car or home, you might want to invest your cash in the stock market. One of the best ways to do this is by buying a low-fee S&P 500 index fund (which holds the 500 largest publicly traded U.S. companies), preferably purchased through a 401(k) or IRA.

Click here to see our list of the best IRA accounts and how these online brokers can help you invest extra cash by buying stocks.

Now let’s look at how much more you can earn by investing in the S&P 500 index instead of opening a CD.

How much the S&P 500 index earns vs. the best CDs

As of Oct. 12, 2024, the best CDs were offering 4.70% APY on 1-year terms. But in the past year, the S&P 500 has gained 33.69%. $10,000 invested in the S&P 500 index one year ago would be worth about $13,369 today, while a 4.70% APY CD would only be worth $10,470. That’s a difference of $2,899.

Past performance is no guarantee of future results, and the S&P 500 index has a risk of loss, like all investments. Stocks, including the S&P 500, go up and down, sometimes for mysterious reasons. The S&P 500 index can go up 30% or more in a year, and it can go down by 20% or more in a year (like it did recently in 2022, when it lost about 19%).

If you can’t stand the thought of losing money to investment risk, you should keep your cash in a savings account.

But if you have extra cash you don’t need this year or next, you could earn a lot more by investing that money in stocks with the S&P 500 index. For the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7%.

Here are a few comparisons of how much you could earn by investing $10,000 in the S&P 500 index (assuming 10.7% CAGR) vs. the best CDs (with APYs shown for various CD terms).

Even the best 5-year CDs can’t compete with the compounding power of average returns from the S&P 500 index. If you’re able to invest your money for the long term, and you can stomach some short-term ups and downs (the S&P 500 index does not always deliver 10.7% per year, but over time it tends to), investing can be a better deal for your money than even the best CDs.

Bottom line

Don’t assume that CDs are the best place for your cash. If you already have an emergency fund in the bank, if you have the risk tolerance and time horizon to invest in stocks, the S&P 500 index can outperform even the best CDs. Buying and holding the S&P 500 index for the next few years could be a better money move than opening a CD.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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