Putting $10K Into a CD Now Could Cost You Over $100K in the Long Run. Here’s How

CDs may seem like a great investment right now. After all, if you look at the best CD rates, you’ll see many options offering yields above 5.00%. You may be really tempted to jump on those deals and add some CDs to your portfolio.

The only problem is, if you do that and you stick with CDs for the long term, you could find yourself with a whole lot less money over time than you could have had. Let’s take a look at why CDs may not be the good deal you think they are.

There’s a better alternative to buying a CD

While yields of around 5.00% may seem pretty good, especially when you look at historical CD rates, you have a way better option available to you.

You could put your money into an S&P 500 index fund. These funds are invested in around 500 of the largest U.S. businesses, so they are a pretty safe bet for those investing for the long term, such as in an IRA. In fact, the S&P 500 has very consistently earned 10% average annual returns for many decades.

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You take on a bit more risk with an S&P 500 index fund because you can possibly lose your money with any equities investment — especially if you have bad luck when you buy or sell. However, if you commit to leaving your money invested for a while, that risk is very minimal.

CDs also require you to tie up your money or you could lose some of your gains or even some of your principal if you take it out before the term ends. But while you’re giving up liquidity with CDs, your return on investment is typically less than half of what an S&P 500 fund could provide. That has big consequences.

Here’s what happens if you put money into a CD instead of the market

Just how serious are the consequences of opting to buy a CD with money that belongs in the market? Here’s what would happen:

• If you invested $10,000 this year in an S&P 500 index fund and left it alone for 30 years, at the end of the 30 years you’d have around $174,494 by the end of that time.
• If you invested $10,000 this year in a CD paying 5.00% and you managed to consistently keep your funds in CDs offering these yields for the next 30 years, you’d end up with about $43,219. That is a lot less money — over $100,000 less.

As stark as these numbers are, the reality for the CD investor looks even worse. That’s because it’s all but guaranteed that CD rates aren’t going to stay at 5.00%, or anywhere close to that figure, for the long haul.

Rates are very high right now because the Federal Reserve had to repeatedly raise the federal funds rate to fight inflation, but the Fed is planning to cut its benchmark rate late in 2024 or in 2025. Due to this, it’s more likely your CDs would be in the 2.00% to 3.00% range or less in the future.

If you can leave your money alone for a few years to minimize the risks of bad market timing, you could buy shares of an S&P 500 index fund and not a CD. The numbers show this decision is an easy call.

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