A lot of people are rushing to open CDs while rates are still strong. Who wouldn’t want a 5% CD rate that comes with zero risk (other than perhaps an early withdrawal penalty, but only if you cash out your CD before it matures)?
But while earning 5% on your money might seem like a great thing, you may be able to do much better. In fact, one savvy move could help you earn twice as much on your money over time.
Grow your money more efficiently
If you like the idea of snagging a 5% return on a CD, then you might love the idea of earning 10% on your money in an investment portfolio. That 10% is consistent with the S&P 500’s average over the past 50 years. So if you open a brokerage account and load up on S&P 500 ETFs (exchange-traded funds), you can potentially set yourself up with strong returns and grow your money into a much larger sum over time.
Let’s say you have $5,000 to work with. If you put it into a 12-month CD with a 5% APY, you might earn $250 after a year. Beyond that, it’s hard to know what CDs will be paying.
On the other hand, if you put your $5,000 into an S&P 500 ETF and leave it alone for 30 years, you might end up with about $87,250 if you’re able to score a 10% average annual return on your money. That’s a gain of about $82,250.
Don’t be afraid to invest
Of course, one pitfall of investing in the S&P 500, or individual stocks themselves, is that there’s a chance of losing money from one year to the next — whereas if you put $5,000 into a CD, you won’t lose any of that $5,000.
It’s also worth noting that just because the S&P 500’s average annual return has been 10% in the past doesn’t mean you’re guaranteed that same return in your portfolio. You may end up with a smaller return — or a higher one. It could go either way.
If you’re worried about the risks of investing, one thing you should realize is that the S&P 500’s average 10% annual return over the past half-century accounts for years of great performance and years of market downturns. This tells us that people who invest for decades are likely to see good returns in some shape or form, while investing on a short-term basis is more dangerous.
So if you’re only looking to put your money to work for a year or so, then a CD is your better bet. But if you’re willing to invest for a good number of decades, then know that you can grow your money more by putting it into the stock market than settling for the returns a series of CDs will give you.