Sunday, 9 June 2024

CDs Are Paying 5% Today — but if You Want 10% on Your Money, You’ll Need to Do This

by BD Banks

<div>CDs Are Paying 5% Today -- but if You Want 10% on Your Money, You'll Need to Do This</div>

Image source: The Motley Fool/Upsplash

Because CD rates are still sitting at 5.00%, a lot of people I know are rushing to open them. And I can see why.

A 5% return is a pretty sweet deal considering you’re really taking no risk. As long as you bank somewhere that’s FDIC insured and limit your deposit to $250,000 or less, you can sit back and collect your interest without the stress that tends to come with investing in the stock market.

But while a 5% return on your money might seem like a great deal, you could do worlds better with stocks. So if you’re saving for a long-term goal, stocks are probably a much better option for you.

Why limit yourself to 5%?

A number of banks today are offering 5.00% APYs on CDs for a 12-month term. This means that if you have $10,000 to put into a CD, you can earn $500 worth of interest in a year without having to break a sweat.

And to be clear, a CD is a great bet if you’re saving for a goal that’s about a year out, like buying a new car or splurging on your dream vacation. But if you’re saving for a goal that’s many years away, like college or retirement, then stocks could do a lot more good for you.

Over the past 50 years, the stock market has averaged an annual 10% return, as measured by the performance of the S&P 500 index. That’s twice the return on a 12-month CD today.

But also, remember that today’s CD rates aren’t the norm, and that today’s rates may not be available once 2024 comes to an end. With a stock portfolio, on the other hand, you might earn an average annual 10% return over the next 30 or 40 years.

And if you’re curious as to how much of a difference that might make, let’s imagine you’re able to deposit $10,000 into CDs and earn a 5% return on your money for the next 30 years. It’s unlikely, because rates are likely to fall, but we’ll go with it.

In that case, you’re looking at turning your $10,000 into about $43,200. But if you load up on stocks and invest that $10,000 at a 10% return over the next 30 years, you could end up with around $174,500 to your name. That’s a difference of $131,300.

How to invest in stocks when you don’t know how to invest at all

I’m hoping I’ve convinced you to go all-in on stocks instead of CDs if you’re saving for a milestone that’s many years into the future. But what if you have no idea how to put together a stock portfolio?

The good news is that that’s not a problem. And no, I don’t recommend picking random stocks out of a hat. I recommend loading a portfolio with S&P 500 ETFs, or exchange-traded funds. This way, you’re basically investing in the 500 largest publicly traded companies today without having to do much research or buy shares of each company individually.

Remember, the 10% return I keep referring to above is based on the S&P 500’s performance over the past half-century. So it’s an index worth putting your money into.

Getting a 5.00% APY on a CD might read like an awesome deal. And in the context of CDs, that’s an excellent rate. But trust me when I say you can do better. And if you want to grow your money more efficiently over a long period of time, then investing is really the way to go.

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