Some CDs Are Still Paying Close to 5%. Here’s Why I Wouldn’t Open One

Just a few months ago, 5% CDs were pretty easy to find. Unfortunately, the days of 5% CDs are largely behind us. The Federal Reserve opted to lower its benchmark interest rate by half-a-percentage-point in mid-September in response to slowing inflation. And when the Fed’s benchmark interest rate falls, savings account and CD rates tend to follow.

That said, even though CDs, for the most part, aren’t paying 5% anymore, you can still lock in a pretty competitive rate in the 4% range. That’s not such a raw deal given that with CDs, your principal deposit is protected as long as you bank somewhere that’s FDIC-insured and limit your deposit to $250,000. 

But although today’s CD rates are still solid, I’m not motivated to open one. And the reason is that there’s a much more efficient way for me to grow my money.

I’m not willing to settle for lower returns

If I put $10,000 into a 12-month CD paying 4.5%, I’m guaranteed to earn $450 in interest. And that’s a good deal. 

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American Express® High Yield Savings APY 4.10% Rate info Circle with letter I in it. 4.10% annual percentage yield as of October 12, 2024 Member FDIC.	APY 4.10% Rate info Circle with letter I in it. 4.10% annual percentage yield as of October 12, 2024	Min. to earn $0
Capital One 360 Performance Savings APY 4.10% Rate info Circle with letter I in it. See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Sept. 27, 2024. Rates are subject to change at any time before or after account opening. Member FDIC.	APY 4.10% Rate info Circle with letter I in it. See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Sept. 27, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
CIT Platinum Savings APY 4.70% APY for balances of $5,000 or more Rate info Circle with letter I in it. 4.70% APY for balances of $5,000 or more; otherwise, 0.25% APY Min. to earn $100 to open account, $5,000 for max APY Member FDIC.	APY 4.70% APY for balances of $5,000 or more Rate info Circle with letter I in it. 4.70% APY for balances of $5,000 or more; otherwise, 0.25% APY	Min. to earn $100 to open account, $5,000 for max APY

But what happens after 12 months? Given that the Fed is likely to continue lowering its benchmark interest rate, CD rates are likely to fall in the coming year. And even if that somehow doesn’t happen, I might earn a much higher return on my money over time by investing it instead of putting it into a series of CDs. 

Over the past 50 years, the S&P 500 index’s average annual return has been 10%, accounting for good years and bad years. If I put $10,000 into a stock portfolio and I’m able to snag a 10% return, then in 20 years, I’m looking at growing that investment into $67,275. 

Even if I were to earn 4.5% on my $10,000 for 20 years in a series of CDs, that only leaves me with $21,911. That’s a difference of over $45,000. And, well, why should I settle for $45,000 less?

Don’t sell yourself short

There’s only so much money to be gained by putting cash into CDs today — even with rates remaining pretty strong. That said, one reason you should choose a CD is if you have near-term plans for your money. 

When you invest, you risk losing money, so you need a lengthy window to recover from market downturns. As a general rule, I try to only invest money if I think I won’t need it for about seven years or more. 

If you have money you might need in a year or two, though, then a CD is a smart bet. You can check out this list of the best CD rates to lock in a great return on your money.

However, if you have a pile of cash you don’t expect to use for several years, then investing it could make you a lot richer over time. In that case, find a great online brokerage account and start putting your money to work.

It’s easy to be tempted with CDs given that rates aren’t so far off from 5%. But if you look at the big picture, you’ll realize that a stock portfolio could make you wealthier in the long run.