CDs Are Paying 5%, but Here's How You Can Do Way Better

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There's a reason certificates of deposit (CDs) have been such a popular choice among savers these past few months. CD rates are sitting at a high following a series of interest rate hikes on the part of the Federal Reserve.

In fact, many banks today are offering a 5% APY on CD terms of 12 months or less. This means that if you have $5,000 on hand and you put it into a 12-month CD, you might earn an easy $250 without taking on any risk (provided, of course, that you bank somewhere that's FDIC-insured).

But while today's CD rates may be appealing to you, you should know that sticking to CDs may not be your best bet in the long run. In fact, there's an easy step you can take to potentially score twice as high a return as what a CD might pay you.

Know when to turn to the stock market

If you're saving for a shorter-term goal -- one that's a year or so away -- then CDs make sense. A one- or two-year window isn't enough time to ride out a potential stock market downturn, so it's best to stick to safe options like CDs if that's your time frame rather than invest your money. But if you're looking to put your money to work on a longer-term basis, then investing in stocks has the potential to deliver far better results than CDs.

Over the past 50 years, the stock market's average annual return has been 10%. That's twice what CDs are paying today, and it's far more than what CDs have typically paid over time.

But let's be optimistic and assume that you can get a 5% return on a CD for the next 25 years. With a $5,000 deposit today, you're looking at growing your money to about $17,000.

On the other hand, with a 10% return, a $5,000 investment in stocks today could be worth $54,000 in 25 years. That's more than three times the return you might get by opening a CD -- even at a great rate.

Investing money doesn't have to be complicated

At this point, you may be inclined to put your money into the stock market instead of CDs. But what if you don't have any experience with investing and therefore don't know which stocks to choose?

That's an understandable situation to be in -- and a common one at that. But there's actually a simple solution for people who want to invest their money but aren't sure exactly how. All you need to do is buy shares of an S&P 500 ETF, which most brokerages allow for.

The S&P 500 index consists of the 500 largest publicly traded companies today. And it's used as a benchmark for the broad stock market's performance.

The nice thing about buying shares of an S&P 500 ETF (which stands for exchange-traded fund ) is that you don't have to spin your wheels researching different businesses or worrying about diversification within your portfolio. An S&P 500 ETF basically has you investing in the stock market on a whole, and that right there gives you the diversification you need.

There's nothing wrong with earning 5% on your money in a CD if you need a short-term place to park some cash. But don't settle for a CD if you have a longer savings window, even with rates being where they are today. With stocks, you could do so much better. And don't you deserve that?

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