If you have some money to spare and want to use it wisely to improve your financial future, you have a few choices for where to put it. One option is to put funds into a brokerage account and use them to invest in the stock market. Opening a certificate of deposit, or CD account is another option.
There are both pros and cons for either option, so to help you decide which is right for you, ask yourself these key questions.
1. Can I afford to risk losing the money?
Investing in the stock market carries some risk. The specifics of the investments you make and your investing timeline determine the level of risk you're taking on -- but even with relatively safe investments, there's always a chance you could lose money.
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If you invest in a certificate of deposit, you don't have to worry about that. CDs are FDIC insured, which means you are guaranteed not to lose money on them, up to FDIC insurance limits. Now, you can face penalties if you choose to voluntarily withdraw your money from a CD before the term expires, but you're in direct control over whether you do that so you can choose to avoid even this potential financial risk.
If you absolutely cannot afford to risk losing the money you are investing -- say, because you need it for a home down payment in a few months for a house you're under contract on -- then you should not put the money into the market. A CD is a better bet.
2. When am I hoping to cash in on the investment?
The next key question to ask yourself is when you're hoping to start accessing the invested funds and the returns that you earned.
See, if you invest in the stock market, your risk of loss is greater if you do so for the short term. That's because even really great investments can perform poorly over a period of a few months or even a few years if there are poor economic conditions or if you timed your investment wrong. Investing for a secure retirement is a better bet, as you'll have a longer timeline.
The S&P 500, for example, is a financial index of 500 of the largest U.S. companies. Over many years, it has consistently produced 10% average annual returns. But in some individual years, there have been big losses, as the table below shows.
| Year | Annual Percentage Change |
|---|
| 2023 | 13.98% |
| 2022 | (19.44%) |
| 2021 | 26.89% |
| 2020 | 16.26% |
| 2019 | 28.88% |
| 2018 | (6.24%) |
| 2017 | 19.42% |
| 2016 | 9.54% |
| 2015 | (0.73%) |
| 2014 | 11.39% |
| 2013 | 29.60% |
| 2012 | 13.41% |
| 2011 | 0.00% |
| 2010 | 12.78% |
| 2009 | 23.45% |
| 2008 | (38.49%) |
| 2007 | 3.53% |
| 2006 | 13.62% |
| 2005 | 3.00% |
| 2004 | 8.99% |
| 2003 | 26.38% |
| 2002 | (23.37%) |
| 2001 | (13.04%) |
| 2000 | (10.14%) |
Data source: Macrotrends.
If you are hoping to cash in your investment within five years or less, putting your money into the market is too risky because you could get caught in a downturn, not be able to afford to wait for recovery, and end up buying high and selling low.
CDs, on the other hand, have a wide range of different terms. It's common to find CDs that require you to commit for as little as three months, as long as five years, or for a variety of different time periods within that range. So, if you'll need your money soon but not immediately, you should be able to find a CD that works with your timeline.
3. What are my goals for the funds?
Finally, you should think about your goals for the money. Are you hoping to maximize returns at the price of taking on more risk? If so, then investing in the stock market is the right call. On the other hand, if keeping the money safe is a priority, a CD could be the better solution.
By asking yourself these three questions, you can decide where your money should go. It's always best to carefully consider any investment decision, because you work hard for your money and it should work hard for you.
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FAQs
Finally, you should think about your goals for the money. Are you hoping to maximize returns at the price of taking on more risk? If so, then investing in the stock market is the right call. On the other hand, if keeping the money safe is a priority, a CD could be the better solution.
Is it better to invest in a CD or the stock market? ›
Because CDs offer fixed interest rates, they're better for short-term financial goals where you don't want any risk of losing money. Stocks are better for financial goals that are more than five years away, such as retirement.
Why should you put $15000 into a 1 year CD now? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Why should you put $20,000 into a long term CD now? ›
The bottom line
If you put $20,000 into a 3-year CD, you could earn more than $3,000 in interest by the end of the term, depending on the interest rate you get. And, a CD is safe and secure thanks to the insurance it comes with.
Is it worth putting money in a CD right now? ›
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
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.
Why is CD not a good financial investment? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
What is a disadvantage to putting your money into a CD? ›
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. “During times of uncertainty, liquidity is often paramount.
How much does a $100,000 CD make in a year? ›
The Bankrate promise
| Type of 1-year CD | Typical APY | Interest on $100,000 after 1 year |
|---|
| CDs that pay competitive rates | 5.30% | $5,300 |
| CDs that pay the national average | 1.59% | $1,590 |
| CDs from big brick-and-mortar banks | 0.03% | $30 |
Jul 11, 2023
The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.
While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.
Should I wait to put money in a CD? ›
CD rates are at a 3-year high—but waiting longer to buy could be a gamble. Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed's rate hikes. The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022.
Should I put money in a 401k or CD? ›
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.
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.
Should I lock in a CD now or wait? ›
The bottom line. The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.
Is it better to have one CD or multiple? ›
Use Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
What happens if you put $500 in a CD for 5 years? ›
For example, if you deposit $500 in a five-year CD that earns a 5.15% APY, your balance by the end of five years will be $642.71, earning you $142.71 in interest. However, if the interest rate is 3.25%, your earnings will only be $586.71, a difference of $56 in interest earnings.
Which pays more a CD or money market? ›
CDs tend to have higher rates than money market accounts and give no access to your money until a term ends. Funds get locked up for a set period of months or years, and withdrawing early typically results in a penalty, such as several months to a year's worth of interest. Most often, CD rates are fixed.
What is the biggest negative of investing your money in a CD? ›
Disadvantages of investing in CDs
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.
Are CDs a good investment during a recession? ›
CDs are primarily a safe investment. They are guaranteed by the bank to return the principal and interest earned at maturity. CDs can provide modest income during turbulent economic times like recessions when other types of investments often lose value.
