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CDs are paying 5.00% right now, but you could earn 10% via another investment. Find out why you may still want a CD anyway. [[{“value”:”
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The yields paid by certificates of deposit (CDs) are pretty impressive right now. The Ascent has a long list of CDs paying above 5.00%, all of which are FDIC insured, so there’s no risk when you put money into them.
Earning 5.00% on your money without taking a chance of loss is a good deal. But there’s another pretty safe investment that could pay you double that amount.
But despite the better return on investment (ROI) offered by another investment type, there are times when you should stick with opening a CD. Here’s why.
This investment could pay you double what a CD does, but it’s not right for everyone
If you’re looking to minimize risk and maximize returns, an S&P 500 index fund is a pretty good bet — and a pretty great alternative to CDs.
The S&P 500 is a financial index that tracks around 500 large U.S. companies. It has consistently produced 10% average annual returns. That’s about double what even the most competitive CDs are paying. And no one who has invested in an S&P 500 fund for a period of 20 or more years has ever lost money, no matter how poorly timed their investments.
There are S&P 500 index funds that make investing easy. They tend to have low expense ratios because they just track the performance of the financial index. You can open a brokerage account today and invest in one in minutes, often with no minimum investment required. And you may want to — in some situations.
A CD could still be a better investment for some people
Earning 10% is no doubt better than earning 5.00%. And since the S&P 500 has a pretty consistent track record, you aren’t taking on a huge risk when you buy it.
Despite that, some people are actually still better off investing in a CD. Here’s why. The S&P presents limited risk over the long haul. But in the short term, you could definitely lose money. Just look at the table below that shows the recent performance of this index.
As you can see, if you had a shorter investing timeline and bought in at the wrong times, you’d have definitely lost money if you needed to sell after a year or two to access your funds.
When you buy a CD, you don’t take that risk. So, if you have an investing timeline of around five years or less, a CD is a better bet despite the lower maximum ROI. You can open a CD right now that offers you returns upward of 5.00% and that requires you to lock up your funds only for a few years or a few months. Less than 10%, but still pretty good.
Let’s say you have some cash you’ll need in a year. You can’t afford to risk putting it into the market, but you can open a 12-month CD paying a competitive rate as high as 5.25%. You’ll definitely earn the promised ROI and won’t take a chance of losing your money (unless you break your CD term early and the penalty assessed is more than you’ve earned in interest to that point).
Is opening a CD right for you?
Here’s the bottom line. If you have money you won’t need for five years or more, open a brokerage account today. If you plan to buy an S&P 500 fund, you should open one of the best brokerage accounts for ETFs so you can invest with no commission fees.
If you have money you can tie up for between a few months and five years, then open a CD. The Ascent regularly tracks CDs with the best rates, so check out the offerings and choose one with a term that works for you.
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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 a disclosure policy.
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