CDs are undoubtedly offering some pretty impressive yields right now.
When you consider the best CD rates available, you’ll see eye-popping numbers of 5.00% and even higher. For investors who purchased CDs pre-pandemic and who would’ve been excited about any return on investment above around 2.00%, the yields CDs are offering today may seem pretty amazing.
While you may be tempted to put as much money as you can into CDs to take advantage of the great rates available now, you should not rush to add this investment to your portfolio. In fact, most people should forget about CDs entirely and put money into two other places instead.
Here are the types of accounts you’re better off depositing your hard-earned funds into compared with CDs.
Savings accounts
Savings accounts can be a really great alternative to CDs right now. A high-yield savings account can offer you rates that are similar to, or better than, the rates you would get if you invested in a CD. But savings accounts don’t force you to make a commitment to them in order to get that rate.
If you want to earn the generous yields CDs have available in the current economic climate, you must agree to leave your money invested for the term length. If you break that agreement and don’t fulfill your obligation, you face a penalty. This can be a big problem if it turns out you need the money that you put into the CD before the investment matures.
With savings accounts, you don’t have to worry about that. You keep access to your money, and your account is FDIC insured (so are CDs), so you can’t lose it to bank failure (amounts up FDIC insurance limits), and you can still earn a competitive return on your investment. Simply put, a savings account is a better place to keep the money you’ll need for the short term, since you’ll have access to it whenever you want.
Brokerage accounts
If you won’t potentially need your money anytime soon, there’s a different account you should use that beats out CDs. You should put your money into a brokerage account. This is a better place for it than CDs because you can earn a much better return with minimal additional risk.
You can lose money in the stock market. But if you’re investing for at least five years and you opt for less-risky investments like the S&P 500, the chances of you actually ending up with less than you started with are pretty slim.
The S&P 500 has consistently produced 10% average annual returns over the long term, so as long as you have time to wait out downturns, there’s reason to believe it should do the same for you.
A return of around 10% is better than the 5.00% or so APY that CDs are currently paying. So you should use a brokerage account to get your money into the market instead of buying a CD if you have a long enough investing timeline.
With savings accounts better for short-term investments than CDs due to the added liquidity and competitive rates, and with brokerage accounts beating out CDs for long-term investments due to higher returns with minimal added risk, there’s no reason to buy CDs. Forget about doing so, and get your money into a savings account or brokerage account (or both!) where it belongs.
