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A certificate of deposit, or CD, lets you lock in an interest rate for a fixed amount of time. This guaranteed rate can provide you with a sense of security, but the flip side of that coin is that your savings could possibly earn more in the stock market. CNBC Select walks you through how to decide whether to set aside some money in a long-term CD vs. investing it in the market.
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CD or the market? What to consider first
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.
Once you know your time horizon
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 5.36% 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.
CIBC Bank USA CDs
Annual Percentage Yield (APY)
Up to 5.25% APY
Terms
From 9 months to 30 months
Minimum deposit
$1,000
Monthly fee
None
Early withdrawal penalty fee
CIBC Bank USA may charge a 30-day penalty if you withdraw your CD funds before maturity
Terms apply.
If you have less money to work with, consider a one-year CD with BMO Alto. There's no minimum deposit requirement and the rate is 3.00% APY.
BMO Alto CDs
Annual Percentage Yield (APY)
From 2.75% to 3.00% APY
Terms
From 6 months to 60 months
Minimum deposit
None
Monthly fee
None
Early withdrawal penalty fee
An early withdrawal of principal before maturity will cost an early withdrawal penalty. The penalty is calculated using the interest rate applicable to the CD at the time of early withdrawal. If the amount of the penalty exceeds the amount of your accrued and unpaid interest, then a reduction of principal would be required in order to pay the penalty:
Terms apply.
In the long term
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 3.50% 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.
Learn more: 5 factors to pay attention to when choosing a CD
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.
Vanguard
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $100 to enroll
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)
Bonus
None
Investment vehicles
Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other: Vanguard 529 Plan
Investment options
Stocks, bonds, mutual funds, CDs, ETFs and options
Educational resources
Retirement planning tools
Terms apply.
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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.
Meet our experts
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.
Why trust CNBC Select?
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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