Got $500? Here's How to Know if a CD Is Worth Opening

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Even though the Federal Reserve recently cut its benchmark interest rate by half a percentage point, that rate is still elevated and CD rates are still pretty strong.

Granted, you may not be looking at a 5% CD like you could've locked in a few months ago. But with many CDs still paying somewhere in the ballpark of 4.5%, that's not a terrible deal considering that your CD is basically risk-free. This assumes you're banking somewhere that's FDIC-insured and are limiting your deposit to $250,000.

But what if you only have $500 to put into a CD? Is it worth it?

The quick answer is, maybe. But there may be a better way to put your $500 to work.

It's a matter of timing

Whether CDs are paying 3%, 4%, or 5%, they're generally a good option for a short-term investment. In fact, CDs aren't really an investment per se -- they're a banking tool you can use to lock in a guaranteed interest rate for a period.

But because a stock portfolio is likely to generate a much higher return than a CD, you should aim to invest your money if you have a pretty long savings window -- generally 10 years or more. You should give yourself at least 10 years because stock values can fluctuate a lot from one month or year to the next. And you need time to ride out prolonged market downturns.

However, over the past 50 years, the stock market's average annual return has been 10%, accounting for years when stocks did extremely well and years when their value declined substantially. When you compare that to the 4.5% CDs are paying today, and when you consider the fact that 4.5% CD rates aren't even the norm, it's easy to make the case for investing as long as you have ample time to ride out market declines.

How much can you earn with $500?

Now, let's talk about that $500 specifically. If you put it into a 12-month CD with a 4.5% APY, you're earning $22.50. After the one-year mark, well, who knows what you'll earn? We don't have a crystal ball, so it's impossible to know what CD rates will be at that point.

However, if you put $500 into a stock portfolio that gives you a 10% annual return and you leave that money alone for 20 years, you could end up with about $3,364. That means you'll have gained $2,864. And when you divide $2,864 by 20 years, you get about $143. That's more than the $22.50 in interest you'd be looking at in a 12-month CD with rates still close to recent highs.

Know when a CD makes sense

Whether you have $500, $5,000, or $50,000 to work with, the general rule is that CDs are a good bet when you have a shorter savings or investment window. But if you have 10 years or more, look beyond CDs -- even if you're talking about a relatively small amount of money. You may be surprised -- in a good way -- at how much your money may grow.

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