Should I Put My Money in a Long-Term CD or Invest It?

With savings rates still high and more interest rate cuts possible in 2024, savers today are giving a lot of attention to CDs.

A certificate of deposit lets you lock in a fixed interest rate for a fixed amount of time. That’s an attractive option in today’s market, where savers can find CD rates of up to 5.66%. That far outpaces the current inflation rate of 3.4%, so your money is protected from being devalued.

But the term length you choose is a big factor when deciding whether to lock up your money in a CD or put it in the stock market.

Sara Kalsman, a certified financial planner at robo-advisor Betterment, says deciding between a CD or the market is a “very timely” scenario that’s top of mind for her clients.

“Most importantly, it comes down to what the individual is looking to achieve and what their investment time horizon looks like,” Kalsman tells CNBC Select.

Your time horizon is how long you’ll need to keep those funds invested in order to realize your specific goal, whether it’s growing your emergency fund, saving for a down payment on a house or building a nest egg for retirement.

Your investment time horizon should line up with your saving or investing strategy. CD terms range from short-term (one year or less) and mid-term (two to three years) up to long-term (four years or longer).

For the short term — say, six months or a year — CDs can be a smart financial tool to grow your savings fairly risk-free. We’ve compared dozens of offerings and found that one-year CDs currently have the strongest returns.

CIBC Bank USA offers a 5.66% APY on its one-year CD, the highest we’ve found for any term. There is a minimum deposit of $1,000 required, although CIBC has a range of terms and dozens of physical locations across six states.

If you have less money to work with, consider a one-year CD with BMO Alto. There’s no minimum deposit requirement and the APY is a healthy 5.50%.

When you look at longer-term CDs, however, putting your money in the market may make more sense. A 10-year Discover® Certificate of Deposit has a decent 3.80% APY, for example, but that pales in comparison to the average stock market return for the last 10 years, which has been about 12.39% as measured by the S&P 500 Index (or 9.48% when adjusted for inflation).

Longer-term CDs also have less liquidity since savers are typically subject to penalties if they withdraw before the maturity date.

Kalsman generally holds off on recommending 10-year CDs and says she doesn’t see other financial advisors endorsing them, either. Not many banks even offer CDs with 10-year terms — the few that do include Discover®, Vio Bank, EmigrantDirect and MySavingsDirect.

“I’m a huge fan of liquidity,” Kalsman says.

To meet a financial goal that’s a decade or further off, you can afford to take on a bit more risk since there’s enough time for your portfolio to recover from market downturns.

If you’re new to investing, try a low-cost exchange-traded fund (ETF). They give investors some exposure to the stock market, helping to diversify their portfolios and lower their risk.

Many ETFs track a market index, like the Vanguard 500 Index Fund (VOO), which follows the S&P 500.

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.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Sara Kalsman, a certified financial planner at Betterment.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every banking and investing article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of savings and investing products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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