CDs Probably Won't Pay 5% Much Longer. But Here's How You Can Earn More Than 5% on Your Money

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Savers have been able to take advantage of 5% CD rates since the start of 2024. But at this point, your opportunity to lock in a 5% APY on a CD is dwindling quickly.

The Federal Reserve is scheduled to hold its next economic policy meeting on Sept. 17-18. And given that the central bank is expected to make its first interest rate cut in years, savers who want a 5% CD should get moving now.

If you're disappointed that 5% CD rates are coming to an end, don't be. First of all, CD rates are highly unlikely to plummet overnight following the Fed's anticipated rate cut decision. So while a 5% CD may not be available later this year, you might still manage to get a 4.50% APY, which isn't too shabby.

But an even bigger reason to not be bummed about the end of 5% CDs is that there's another way for you to earn an even more impressive return on your money.

It pays to look beyond CDs

If you like the idea of earning 5% on your money, how does 10% sound? That's what the stock market's average annual return has been over the past 50 years, as measured by the performance of the S&P 500 index.

What this means is that if you load up a portfolio of S&P 500 stocks, or buy shares of an S&P 500 ETF (exchange-traded fund) and hold those investments for a good number of years (meaning, 10 years or more), there's a good chance you'll enjoy a similar return (though past results don't guarantee future results). In the long run, choosing stocks over CDs could be instrumental to meeting your financial goals.

Let's say you're 35 years old and are looking to start building a nest egg for retirement with $5,000. It's pretty clear that CD rates are likely to fall. And you should know that the rates savers have enjoyed over the past year or so are not the norm.

But let's imagine for a minute that CDs somehow continue to pay 5% over the next 30 years. If so, you're looking at growing your $5,000 into about $21,600.

But watch what happens when you put your $5,000 into stocks and score a 10% return on your money instead of 5%. In that case, you're looking at growing your $5,000 into about $87,250. Which sum do you think will do more for your future?

It's the end of an era -- but you still have options for growing wealth

It's OK to be disappointed that 5% CDs probably won't be around much longer. But you should also embrace the opportunity to start investing your money in stocks if you're ready to do so.

And if you're not sure how, fall back on an S&P 500 ETF. It doesn't require a lot of research, and it's just as easy as going through the motions of opening a CD. Just plan on investing for the long term, and remember that stock returns can be volatile from year to year and are not guaranteed.

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