Why Even 5.25% Rates Aren’t Luring Me Into a 12-Month CD

Ever since the Federal Reserve lowered its benchmark interest rate in September, CD rates have been falling.

CDs have paid so well these past couple of years because the Fed spent much of 2022 and 2023 raising its benchmark interest rate to fight inflation. Now that inflation has cooled, the Fed is ready to reverse those rate hikes. Unfortunately, that will hurt people with money in the bank.

A few months ago, it was pretty easy to find a CD that would pay you 5% or more on a 12-month term. These days, that’s harder to find. 

That said, if you look around, you may find some CDs paying 5.25% today. Click here for a roundup of some of the best CD rates available now.

But at this point, a 12-month, 5.25% CD doesn’t excite me. Here’s why.

Why I’m not interested in a 12-month CD anymore

I’ll admit that earlier in the year, I opened a few CDs to take advantage of higher rates. But opening those CDs made sense for my financial situation.

The money I put into those CDs is money I might use in about five years, since it’s earmarked for college savings. I opened a 5-year CD to lock in a competitive rate to help me meet a specific goal that’s not so far off. 

But I don’t plan to use the rest of my money for college savings. I’ve saved a specific amount for my kids’ education, and I want to use the remainder of my savings for retirement and other goals that are farther in the future. For this reason, I’m skipping CDs altogether and investing my money instead.

Stocks offer the possibility of much greater returns

While it’s still possible to find CDs paying above 5% if you shop around and meet the requirements (you may be subject to a minimum deposit, or you may need to become a member of a specific credit union to get the best rates), to me, that sort of return is only decent. But over the past 50 years, the S&P 500’s average annual return has been 10%.

If I put $10,000 into a 12-month CD paying 5.25%, I’m guaranteed to earn $525. But what happens after that year is up? CD rates are likely to fall, so my chances of being able to renew a 12-month CD at a rate that’s close to 5.25% are pretty slim. 

On the other hand, if I put $10,000 into an S&P 500 index fund today and leave it alone for 15 years, it’ll be worth close to $42,000 if my portfolio gives me a 10% yearly return. And if I put my money into a 12-month CD at 5.25%, grow it to $10,525, and then invest it in stocks at a 10% return for 14 years instead of 15, I’m looking at about $40,000 instead of almost $42,000. In reality, I don’t have much to gain by choosing a CD for the next year over going all-in on stocks right away.

It could pay to invest your money, too

If you have money earmarked for a goal that’s only a few years away, then a CD is a safer bet than stocks. You generally want to make sure you won’t need your money for a good seven years or longer before putting it into stocks, because you need to build in time to ride out a potential market downturn.

If you’re saving for something you may be ready to jump on in a year or two, like a new house or car, then by all means, shop around for the best CD rate you can find. Otherwise, open a top-rated brokerage account and start investing your money as soon as you can. The more time you give stock investments to grow, the more likely you are to come away with more money than you started out with.