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.
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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.
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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? ›
Rates vary depending on how long of a CD you want, but you can get at least 5% for CDs ranging from one month to as long as five years. That's good, but the stock market tops it by a wide margin. The S&P 500, an index of 500 of the largest companies, has an average return of about 10% per year.
Should I put my money in a CD or stock market? ›
"The bottom line is if the investor has a longer-term horizon for the money and can bear the volatility, stocks generally provide a much better growth potential than CDs," says Spinelli.
Why is CD not a good financial investment? ›
CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.
Why you shouldn't just invest in the S&P 500? ›
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing.
Is S&P 500 still the best investment? ›
An S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO) is the simplest and most effective way to gain exposure to the momentum of the stock market. Warren Buffett recommends an S&P 500 index fund more than any other investment for most people.
Should I invest $10,000 in S&P 500? ›
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Are money CDs safe if the 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? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
What is a disadvantage to putting your money into a CD? ›
Cons of a CD. CDs aren't the right choice for everyone. CDs may offer little liquidity, meager returns, and no tax benefits.
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 1.81% | $181 |
| 2 years | 1.54% | $310.37 |
| 3 years | 1.41% | $428.99 |
| 4 years | 1.32% | $538.55 |
1 more rowApr 24, 2024
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
Why should you deposit $10,000 in a CD now? ›
The national average APY for a one-year CD is 1.74 percent, based on Bankrate research, which shows this average has increased or remained the same since March 2022. If you deposited $10,000 into a one-year CD that pays this national average rate of 1.74 percent, in one year it would be worth a total of around $10,174.
What is the disadvantage of S&P 500? ›
Disadvantages of Using the S&P 500 as a Benchmark
Also, the index contains only larger market-cap companies from the U.S.4 In contrast, investors may own small-cap or foreign companies in their portfolios. Using the S&P 500 as a benchmark may be an inaccurate measure of portfolio return for individual investors.
What are the cons of investing in the S&P 500? ›
The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.
Is it safe to invest everything in S&P 500? ›
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.
What is the biggest negative of investing your money in a CD? ›
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
Which is a safer investment a CD or a stock? ›
Putting money into a CD is safer than investing in the stock market. The returns are often higher when you invest in the stock market. Your financial goals will determine which option is best.
Is a CD a good investment during inflation? ›
By some measures, CDs may be able to keep up with inflation. However, your actual purchasing power is based on your income after taxes. The interest earned from CDs held outside of a qualified retirement plan is taxable as ordinary income, so the net return of CDs is reduced by your effective tax rate.
Is it worth investing in S&P 500 Index Fund? ›
S&P 500 index funds can help you instantly diversify your portfolio by providing exposure to some of the biggest companies in the U.S. Index funds in general are fairly inexpensive compared with other types of mutual funds, making them an attractive option for most investors.
