It seemed like just yesterday that large national banks were paying just fractions of a penny on the dollar for money held within a certificate of deposit (CD). In fact, it was only last March, just before the Fed began its most aggressive rate hiking campaign in four decades, that the best CD rates were barely gophering above 2%, with most banks advertising -- proudly, mind you -- APYs far below that.
Fast forward 16 months later and CDs are having a bonanza year. Many great short-term CDs are on par with or above 5%, and the Fed's "we're not done here yet" attitude toward inflation could cajole CD rates a little higher before the year ends.
In comparison, the S&P 500 is slowly waking up but isn't having the best performance of its life, especially now that the Fed will likely hike rates again this year. We're technically in a bull market, albeit not the bulls of former days -- like those with Michael Jordan -- but a weaker market that can't seem to decide if it will keep moving in this direction.
Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards
The certainty of CDs against the backdrop of market instability may make the former seem like a smarter investment than stocks. But are CDs better for your money in 2023? Let's take a look at what happens when you open a CD instead of investing in the S&P 500.
What a CD offers that the S&P 500 can't
When you deposit your money in a CD over the S&P 500, you get the certainty of guaranteed returns, assuming you don't break your contract and pull money out too early. You know, for instance, that a 5% APY on a 1-year CD will return 5% of your deposit at the end of that one-year term, regardless of the economy or how the stock market swings.
This makes CDs suitable for those who have savings they're not going to use in the near term, as well as those who have a weak appetite for risk. It's also ideal for those who are nearing the completion of a big financial goal -- like saving for retirement or the down payment on a first home -- and want stability over volatility, even if it means getting smaller returns.
Additionally, today's CD rates offer you what stocks have promised for years: the potential to earn above the rate of inflation. Even though you have to factor in taxes on your CD earnings (unless you're holding it in a tax-advantaged account, like an IRA), many top-paying CDs can prevent your money from losing purchasing power to inflation, something stocks can target but can't guarantee.
What the S&P 500 offers that CDs can't match
Hands down, the S&P 500 offers investors greater upside potential. In this year alone, in fact, the S&P 500 has already appreciated by roughly 16% -- far more than what short-term CDs could pay during the same period.
The stock market does have risks, but for investors with long time horizons, the S&P 500's worst years are often more than made up for with the good days. You may not trust the stock market right now (and no one is telling you that you should), but if history can teach us anything, it's that the S&P 500 always bounces back, eventually.
In the end, opening CDs will leave you with more stability, even if you're sacrificing greater returns. You won't have to worry about how your money is performing today, or if you will have a certain balance by tomorrow. This could help you plan your personal finances, as you'll know exactly how much will be returned to you and on what day.
As with most things, a middle ground could be reached -- if you have enough cash to invest in both -- but if you're after near-term stability, perhaps there's no better time to open a top-paying CD.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
FAQs
When you deposit your money in a CD over the S&P 500, you get the certainty of guaranteed returns, assuming you don't break your contract and pull money out too early.
Is it better to invest in CD or S&P 500? ›
In the long term
A 10-year Discover® Certificate of Deposit has a decent 3.75% APY, for example, but that pales in comparison to the average stock market return for the last 10 years, which has been about 12.39% as measured by the S&P 500 Index (or 9.48% when adjusted for inflation).
What happens to my CD if the stock market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
What is the biggest negative of putting your money in a CD? ›
Early withdrawal penalty
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
Is it better to invest in the stock market or CD? ›
Stocks are a better investment when you don't need the money any time soon and can afford to ride out the ups and downs of the market. For goals that are more than five years away, invest in stocks over CDs. Retirement savings is the most common example, but the same is true for any other goal that's still a ways off.
Why is the S&P 500 not a good investment? ›
That said, investing in the S&P 500 doesn't come without risk. Because the S&P 500 is weighted heavily in favor of tech stocks, it tends to underperform when tech stocks underperform. You'll find that SPY and other broad-market ETFs often own a lot of Microsoft, Apple and other leading, large-cap stocks.
Should I move money from stock market to CD? ›
CDs offer the benefit of risk-free growth on your money. With stocks, you might score a much higher return. If you're saving for a near-term goal, a CD is probably your better choice, whereas stocks are more appropriate for long-term goals.
Is it good to open CD during a recession? ›
A certificate of deposit (CD)
Unlike high-yield savings accounts, CD rates are fixed at the time you open the account. If you open a CD at the beginning of a recession when interest rates are high, you'll be able to lock in a high rate for the entirety of the CD's term, even if interest rates go down.
Where is the safest place to put your money during a recession? ›
Cash and Cash Equivalents
Money market funds and high-yield savings are also places to salt away cash in a downturn. Holding cash provides a safety net, allowing investors to jump on opportunities that may arise during economic downturns, such as purchasing undervalued assets when markets decline.
Why is CD not a good financial investment? ›
If inflation is rising, it could outpace the rate of return you're earning on your CDs, especially in a low interest rate environment. This means even though your savings is growing, it won't stretch as far when it's time to spend it. Notably, this is also a risk when keeping money in savings and money market accounts.
Key Takeaways
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
What is the catch with putting your money in a CD? ›
If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate you agreed to when you opened the account. And if you take your money out before a CD matures, you'll pay a penalty -- typically three months of interest.
Can CDs be inherited? ›
"A CD account beneficiary is like the beneficiary on any financial account: simply the person who will inherit the account if the owner of the CD passes away," says Saeid Kian, CEO and co-founder, Ribbon Financial.
What happens to CDs if the stock market crashes? ›
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates.
Can a CD lose market value? ›
All investments carry some degree of risk, but CDs are as low-risk as they come. That said, inflation, early withdrawal penalties and interest rate fluctuations can all eat into your CD's value.
Is it better to put money in a CD or money market account? ›
If you're saving for a medium- or long-term goal, want to earn a fixed interest rate and want the assurance that your money is safe, a CD can be a good investment. If you need access to your money, a money market account would be more fitting as it offers greater liquidity.
Is it better to invest in the S&P 500 or savings account? ›
Investing products such as stocks can have much higher returns than savings accounts and CDs. Over time, the Standard & Poor's 500 stock index (S&P 500), has returned about 10 percent annually, though the return can fluctuate greatly in any given year. Investing products are generally very liquid.
Is the S&P 500 the best place to invest? ›
According to Standard & Poor's, over since 2014 the S&P 500 made an annual average return of over 9% per year. It's worth noting that this spanned across a low-interest rate environment, where cheap borrowing helped grow the economy and make equities seem like an attractive investment.
Should I just put my money in S&P 500? ›
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
