A lot of people are rushing to open CDs while rates are still strong. And thankfully, many banks are still paying 4% or more on CDs — even in light of the Federal Reserve’s pair of interest rate cuts this year.
You may be tempted to open a CD while rates are still as high as they are. But even with rates at 4%, you could lose out on serious money by turning to CDs right now.
Why CDs aren’t your best bet in the long run
CDs are a good option if you’re trying to sock money away for a short-term goal. But in the long run, stocks are a much better option. The reason? They’ve historically delivered much higher returns.
You may be thinking, “But aren’t stocks risky?” And yes, there is some risk in putting your money into stocks. The market could have a bad year and you could end up losing money by selling right away.
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The solution? Don’t sell right away. Instead, hold your stocks for a long period to give yourself opportunities to ride out downturns and come out ahead — and in some cases, way ahead.
Say you have $10,000 to put into a CD, and you’re able to get 4%. Let’s also assume you’re able to keep getting 4% out of CDs over the next 20 years, even though that’s highly unlikely. In that case, you’re looking at growing your $10,000 into about $22,000.
But imagine if you’re able to get 10% a year out of a stock portfolio over 20 years, which is likely based on the S&P 500’s historical performance. In that case, you’re looking at growing $10,000 into about $67,000.
This means that even with CD rates being notably high, over a 20-year period, you could lose out on a whopping $45,000 by sticking with CDs instead of opening a brokerage account or IRA and starting to invest.
Don’t sell yourself short
There’s nothing wrong with putting money into a CD if you’re saving for a short-term goal, like buying a house or car in a couple of years. And if your bank isn’t paying 4%, compare rates at other institutions. Online banks, in particular, are known for offering competitive rates on deposit accounts.
But if that’s not the case, review this list of the best brokerage accounts so you can potentially grow your money well beyond what CDs will pay you. And if you specifically want to invest for retirement, open an IRA for the tax benefits.
Remember, too, that the Fed isn’t done cutting interest rates. Once more rate cuts come down the pike, we could see CD rates drop to 3%, 2%, or lower. It’s happened before, and it could easily happen again. In that case, the difference between what a series of CDs might pay you versus a stock portfolio may be even bigger.
Don’t shy away from stocks because you’re scared of losing money. As you can see, sticking with CDs could cause you to lose money, too.