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.
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.
FAQs
The Answer Is Simpler Than You Think. If you have money that you won't need for five or more years, there's only one place it should go: a brokerage account. You can get the best returns possible by investing, and if you invest for the long term, you're taking on minimal risk.
Should I put my money in a CD or stock market? ›
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.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 6 months | 2.53% | $127.17 |
| 1 year | 2.57% | $260.05 |
| 18 months | 2.17% | $330.55 |
| 2 years | 2.08% | $424.40 |
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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.
What is the biggest negative of putting your money in a CD? ›
The cons of CDs
With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.
What happens to my CD if the stock market crashes? ›
Most certificates of deposit (CDs) do not lose money like a stock market or even real estate investment might. As a savings vehicle, a CD's low risk appeals particularly when considering the high returns earned from the best CDs. Like other banking deposits, the Federal Deposit Insurance Corp.
Are CDs better than the stock market right now? ›
Bottom line. When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.
Who has the highest paying CD right now? ›
Best 1-Year CD Rates
- Mountain America Credit Union – 5.25% APY.
- Merchants Bank of Indiana – 5.25% APY.
- National Cooperative Bank — 5.18% APY.
- Abound Credit Union – 5.15% APY.
- Connexus Credit Union – 5.15% APY.
- Vibrant Credit Union – 5.15% APY.
- LendingClub – 5.10% APY.
- Northpointe Bank – 5.10% APY.
While there aren't any financial institutions paying 7% on a CD right now, there are other banks and credit unions that pay high CD rates. Compare today's top CD and savings rates.
How much does a $20,000 CD make in a year? ›
That said, here's how much you could expect to make by depositing $20,000 into a one-year CD now, broken down by four readily available interest rates (interest compounding annually): At 6.00%: $1,200 (for a total of $21,200 after one year) At 5.75%: $1,150 (for a total of $21,150 after one year)
Certificates of deposit with at least 5% interest
| Institution | Most Competitive CD Term | Highest CD APY Available |
|---|
| Popular Direct | 3 months | 5.05% |
| Lafayette Credit Union | 12 months | 5.04% |
| Limelight Bank | 12 months | 5.00% |
| NBKC Bank | 7 months | 5.00% |
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A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest. CDs are generally low-risk and guarantee a fixed interest rate for the term. Early withdrawal penalties can sometimes reduce the principal, not just the interest.
Do you have to pay taxes on CDs? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Why doesn't Dave Ramsey like CDs? ›
But when it comes to long-term savings, Dave Ramsey cautions against opening a CD. In fact, he insists that CDs are really nothing more than glorified savings accounts with slightly higher interest rates. The problem with those rates is that they don't do a good enough job of keeping up with inflation.
Can CDs be inherited? ›
CDs are treated like any other account as far as inheritance. While probate is frequently used to decide who will inherit particular assets after someone dies, other ways of passing on accounts can be much simpler and less expensive than probate.
What can ruin a CD? ›
Harsher solvents such as acetone or benzene will dissolve the polycarbonate and thereby damage the disc beyond repair. Limited contact (cleaning) with mild solvents such as isopropyl alcohol or methanol is permitted, as these solvents evaporate quickly and will not dissolve the polycarbonate.
How much will a $500 CD make in 5 years? ›
This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.
Which pays more a CD or money market? ›
Differences between deposit accounts
Additionally, a CD is a time-deposit account, while a money market account isn't. Typically, a money market account pays less than a CD because a CD requires you to keep your cash in the account for a set period of time.
Why should you put $5000 in a 6 month CD now? ›
While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.
Why is CD not a good financial investment? ›
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.
