Forget 5% CDs. Here's a Much Better Way to Grow Your Money

Image source: Getty Images

There's a reason so many people have been jumping onto the CD bandwagon. CD rates are sitting at record highs, with many 12-month CDs offering a 5% APY. That's a pretty sweet deal considering you're not taking on any risk in opening a CD (provided your bank is FDIC-insured and your deposit is limited to $250,000).

But while you might consider a 5% CD a deal that's too good to be true, the reality is that you can actually do a lot better than 5%. And if you're looking at a long savings window, you're probably far better off investing your money than settling for what a CD will pay you.

A stock portfolio could do so much more for your money

There's a world of difference between putting money into a CD vs. using it to buy stocks. With a CD, as mentioned, your deposit is guaranteed. That's never the case when you buy stocks. You could invest $10,000 in a portfolio of stocks only to see its value plunge to $8,000 in just a few months' time.

But there's a big upside to putting money into stocks instead of CDs -- you're likely to score a much higher return over the long run. That could spell the difference between meeting your financial goals and falling short.

Today's CD rates are higher than usual. But even today's 5% rates pale in comparison to the stock market's average annual 10% return over the past 50 years.

You should also know that 10% return accounts for years of outstanding stock market performance and years of losses. This should tell you that if you're a long-term investor, you're more likely to make money in the stock market than not.

How much could you make with stocks vs. CDs?

Now, let's see what sort of a difference a stock portfolio might make for your goals vs. a CD strategy. If we assume that CDs will continue paying 5% for the next 25 years (they won't, but we'll go with it), a $10,000 deposit today has the potential to grow into almost $34,000. So in that case, you're looking at about a $24,000 gain.

But let's say you put that $10,000 into a stock portfolio instead. At 10% over the next 25 years, you're looking at a balance of about $108,000. That's a $98,000 gain -- about four-times the gain you'd be looking at with CDs. And whether you're saving that money for college, retirement, or something else, $98,000 is apt to do you a lot more good than $34,000.

Don't be lured by today's CD rates

It makes sense to go after a 5% CD when you're saving for a short period and it's not safe to put your money in stocks. That generally means a period of five years or less.

But for a long-term savings window, investing in stocks is a better bet. Sticking with CDs means settling for a lower return, and one that's likely to inch downward as interest rate cuts start to take hold.

If the idea of investing in stocks makes you nervous, you can mitigate that risk by assembling a diversified portfolio -- meaning, investing in companies across different industries. But if that seems daunting to you, you can buy shares of an S&P 500 ETF ( exchange-traded fund ) that give you built-in diversification.

This strategy basically has you investing in the stock market on a whole. And while you are taking on risk, the reward has the potential to be huge.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .