Think CDs Will Make You Rich? This Strategy Works Even Better

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I know a number of people who opened a CD for the first time in 2024. And the reason boils down to today's fantastic CD rates.

These days, it's not difficult at all to find a CD paying somewhere in the ballpark of 5.00% APY. For a risk-free return, that's a pretty solid deal.

But if your long-term financial strategy is to get rich by opening CDs, then you may be setting yourself up for disappointment. Or, to put it another way, there's a better route you can take for growing your money -- one that might leave you a lot wealthier than limiting yourself to CDs alone.

Don't sell your savings short

Today's CD rates do indeed make it possible to earn a 5% return on your money without taking on any real risk. As long as you bank somewhere that's FDIC insured and limit your deposit to $250,000 (which, let's face it, is probably the case), you won't risk losing out on any principal in the event of a bank failure.

The main risk you take with CDs is an early withdrawal penalty for cashing out early. And that can be avoided by making sure not to tie up money in a CD you might need for an emergency expense.

But tempting as it may be to score an APY of 5.00% on your money in a CD, you should know that over the past 50 years, the stock market's average annual return has been 10%. Of course, this doesn't mean that every year over the past half-century has been a stellar one for the market. Many of us remember the Great Recession of 2007-2009 -- and that stock values took a major hit during that time.

Rather, the 10% return just mentioned is the market's average , accounting for strong years and painful ones alike. This means that if you invest your money in stocks over an extended period of time, you're likely to come out ahead financially -- and well ahead of where you might be with a portfolio of just CDs.

In fact, let's say you have $20,000 to invest, and you decide to put it all into CDs. Even if those CDs return 5% over the next 20 years (a highly unlikely scenario, but we'll go with it), you'd end up with about $53,000.

A stock portfolio with an annual 10% return, on the other hand, could turn your $20,000 into about $134,500 in 20 years. That's a difference of $81,500, which is too great a difference to overlook.

Know when CDs make sense

Opening a CD makes sense when you're looking to earn a nice return on your money but only have a short savings window, meaning you don't have time to ride out a potential stock market downturn.

Say you want to buy a home over the next one to two years. Investing your down payment in stocks is a risky move in that case. If the market tanks, you may not see a recovery that fits with your timeline. So in this situation, it could pay to open a 12-month CD .

But if you're saving for a goal that's a good seven years away or longer, then investing your money in stocks is probably your best bet. Put another way, if you're 35, don't open CDs to save for retirement. Build a stock portfolio so your money can grow at a much faster rate.

It's true that investing your money in stocks means taking on risks that aren't a problem with CDs. But with CDs, you risk falling short of your savings goals. And that's something to keep in mind when making your choice.

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