Here’s How Putting Your Money Into CDs Might Cost You $382,000

If you have a pile of money you’re looking to set aside for the future, you may be thinking of putting it into a CD. With CDs paying 5% today, it’s hard to say no to a return that high given that you’re taking on no risk (assuming you’re not depositing more than $250,000 and your bank is FDIC-insured). 

But while it’s OK to use CDs to save for short-term goals, if you use them to save for long-term goals, you might end up sorely disappointed. In fact, choosing CDs over stock investing in the long run could cost you hundreds of thousands of dollars. 

Don’t risk a giant savings shortfall

There’s a rule of thumb it pays to stick to when investing. You should not invest money you might need to use within the next five to seven years.

The reason? The stock market can be quite volatile. You could invest $10,000 tomorrow only to see your portfolio’s value drop to $8,000 after a year, and $5,000 the year after. 

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Now, the good news is that in that situation, you might then see the value of your portfolio rise back up to $8,000, and then $10,000, and then, eventually, $30,000. So you shouldn’t steer clear of stocks for fear of losing money. 

But the best way to make money in the stock market is to give yourself enough time to ride out downturns and allow recoveries to happen. So if you have a short savings window, CDs are a better bet. 

On the other hand, if you’re saving for a far-off goal like retirement, you shouldn’t limit yourself to CDs — even if rates somehow manage to stay as high as they are today. You could end up seriously short on savings once you’re ready to wrap up your career. 

CDs could cost you a world of difference

To illustrate how drastically different your results might be if you were to save money in CDs over many years instead of stocks, let’s say you have $10,000 available now that you want to grow into a larger sum over 40 years. 

If CD rates somehow stay where they are today so you’re able to earn a 5% return over the next four decades, you’re looking at about $70,400. But if you invest your $10,000 in stocks at a 10% annual return, which is in line with the market’s long-term average, then in 40 years, you’re looking at $452,600. All told, that’s a difference of about $382,000.

Of course, this is just one example. And if you were to save and invest a different amount of money over a shorter or longer period, your results would be different.

But this calculation illustrates an important point. Choosing CDs over stocks for long-term savings could leave you with a lot less money for your long-range goals. While it’s perfectly OK to open a 12-month CD to save for a goal you’re looking to meet in 2025, it’s important to be open to investing in stocks for far-off financial goals you want to achieve.

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