Certificates of deposit (CDs) and stocks are two popular and very different types of investments. CDs are banking products you buy for a set time period, such as five years, and earn a fixed rate on your money. Stocks are shares of companies, so their value depends on the performance of the underlying company.
If you're deciding between CDs or stocks, here are the returns you can expect from each one and how to figure out the right investment for you.
CD vs. stock performance
Thanks to recent interest rate hikes, CDs are currently offering their highest payouts in years. The best CD rates are currently over 5.5%. Rates vary depending on how long of a CD you want, but you can get at least 5% for CDs ranging from one month to as long as five years.
That's good, but the stock market tops it by a wide margin. The S&P 500, an index of 500 of the largest companies, has an average return of about 10% per year.
But there are no guarantees with the stock market. With CDs, you know how much interest you'll earn and for how long. The stock market is unpredictable. It has been doing well lately. The S&P 500 increased by 24.2% last year, and has continued growing this year. That's not always the case, though. In 2022, it declined by 19.4%.
Invest in CDs if you need stability
Because CDs offer a fixed return, they're the better choice if you'll need the money in the near future. For goals you have within the next five years, go with CDs over stocks. To give you a few examples, CDs can work well for money you plan to use for:
- A down payment on a home
- Your wedding or honeymoon
- Upcoming college costs
- Buying a car
These are all situations where it's risky to put your money in the stock market. Stocks may offer a greater potential return, but unlike CDs, they can also lose value. The last thing you want is for your wedding or home fund to be worth less than because of a sudden market downturn.
You could also use other banking products to save for short-term goals. High-yield savings accounts are a popular choice. The advantage with CDs is that they let you lock in an interest rate. And it's possible that interest rates will go down later this year, so now is considered a good time to get a CD.
Invest in stocks for long-term financial goals
Stocks are a better investment when you don't need the money any time soon and can afford to ride out the ups and downs of the market. For goals that are more than five years away, invest in stocks over CDs.
Retirement savings is the most common example, but the same is true for any other goal that's still a ways off. For example, if you're in your early 20s and would like to buy a home in your mid-30s, you could put that money in the stock market. You still have plenty of time to let your money grow and get through any downturns.
As you get closer to your goal, you can adjust your strategy. Continuing the example above, once you're within five years of buying a home, you'll probably want to sell some of your stocks and put that money in a savings account or CD for your down payment.
You may want both for a balanced portfolio
Investing in CDs or stocks doesn't need to be an all-or-nothing decision. Many investors put money in both: CDs for their short-term goals and stocks for their retirement nest egg.
It's wise to have some money in the bank and some in the stock market. Stocks are one of the best ways to build long-term wealth, but they're too volatile to have all your money in them. That's where high-yield banking products can be useful, so you have cash when you need it. Some people stick to savings accounts for that, but CDs generally pay a bit more and allow you to lock in your interest rate.
These savings accounts are FDIC insured and could earn you 14x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 14x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
FAQs
Invest in stocks for long-term financial goals
Is it better to do a CD or invest? ›
Bottom line. When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.
Are CDs worth buying right now? ›
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.
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 | 2.54% | $127.67 |
| 1 year | 2.63% | $266.19 |
| 18 months | 2.24% | $341.38 |
| 2 years | 2.09% | $426.48 |
3 more rowsJun 14, 2024
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.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
How should I invest money right now? ›
Here are eight great ways to start investing right now.
- Stock market investments. ...
- Real estate investments. ...
- Mutual funds and ETFs. ...
- Bonds and fixed-income investments. ...
- High-yield savings accounts. ...
- Peer-to-peer lending. ...
- Start a business or invest in existing ones. ...
- Investing in precious metals.
Waiting to open a CD could mean missing out on some stellar rates. Now, you can lock in high rates on both short-term and long-term CDs, and you can score some serious interest just by opting to deposit a larger lump sum into your CD.
What bank is paying 5% on CDs? ›
Summary
| Institution | Term length | APY* |
|---|
| EverBank | 9 months | 5.05% |
| Marcus by Goldman Sachs | 12 months | 5.15% |
| Capital One 360 | 12 months | 5.00% |
| Evergreen Bank | 6 months | 4.75% |
6 more rowsNow That's What I Call Music 4 was the first ever Now album to release on CD with an estimated 500 copies pressed. While this CD did get re-released in 2019, the original 15-track album is the one that holds some value, selling for around £200-£400.
Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Should I put a million dollars in a CD? ›
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Who has the highest paying CD right now? ›
Best 1-Year CD Rates
- Nuvision Credit Union – 6.00% APY*
- NexBank – 5.35% APY.
- TotalBank – 5.35% APY.
- Abound Credit Union – 5.30% APY.
- Northpointe Bank – 5.30% APY.
- Prime Alliance Bank – 5.30% APY.
- USAlliance Financial – 5.30% APY.
- Colorado Federal Savings Bank – 5.30% APY.
Stocks are a better investment when you don't need the money any time soon and can afford to ride out the ups and downs of the market. For goals that are more than five years away, invest in stocks over CDs. Retirement savings is the most common example, but the same is true for any other goal that's still a ways off.
Should I move money from stock market to CD? ›
A well-balanced portfolio typically has CDs and stocks
Here are a few reasons why: Diversification in your asset allocation can reduce risk: Stock investments come with more risk than CDs. However, when you add CDs to the mix, you may be able to reduce risk, increasing your risk-adjusted returns.
Is it possible to lose money on a CD? ›
In sum, yes, you can lose money on a CD. But as long as you don't withdraw too early, you'll be left with at least your principal. Keep your money in for the entire term, and you won't lose anything at all -- you'll have your principal, plus money earned on today's high APYs.
Is a 6 month CD worth it? ›
A six-month CD is worth it as long as you're getting a solid return and you can keep your cash locked up for six months without having to withdraw early, thus paying a penalty and forfeiting earnings.
Is a CD a good way to make money? ›
If you're looking to earn more on the money in your savings account without the risk that comes with investments, like the stock or bond market, opening a CD may be an attractive option. As you shop for CDs, you may want to consider more than finding the highest APYs.
Can you live off CD interest? ›
However, CDs are unlikely to provide you with the returns you need to build wealth for the future or live off the interest — unless you already have a large amount of money and ladder your CDs to avoid penalties. Additionally, CDs lack the liquidity you'd need for something like an emergency fund.
Which pays more a CD or money market? ›
CDs typically offer higher interest rates compared to regular savings or money market accounts. Generally, the longer a CD's term, the more interest it pays, helping offset the loss of liquidity.
