Key takeaways
- Although CDs offer great returns, there may be more lucrative options.
- Dividend stocks can offer better returns, as can bond funds.
- Consider your risk tolerance and investing horizon when making your choices.
If you’re looking for a safe place to store your money while earning a return, you might be thinking about opening a certificate of deposit. A CD is similar to a traditional savings account, but your bank might pay you a higher interest rate in exchange for locking your funds away for a set amount of time. However, cashing out a CD before it matures will typically result in a penalty.
Depending on your financial goals, investing timeline, and your risk tolerance, CDs can make sense. However, there are other options to consider if you’re looking to maximize your earnings.
5 ways to get better returns than CDs
- Investing in dividend-paying stocks
- Paying down high-cost debt
- Exploring peer-to-peer lending
- Investing in bond funds
- Opening a high-yield savings account
1. Dividend-paying stocks
Some companies pay out portions of their profits to shareholders on a regular basis. Some examples include:
- Home Depot (HD)
- Starbucks (SBUX)
- Procter & Gamble (PG), which has increased its dividend for 68 years in a row
Investing in dividend-paying stocks carries the potential to earn a yield higher than CDs, but there’s a real risk you could lose your principal, too. Buy a stock at $20 per share today, and it could be worth $15 per share six months from now.
Kimberly Foss, a certified financial planner and senior wealth advisor with Mercer Advisors, says because stocks can come with such risk, you have to ask yourself how much risk you’re willing to take. While that risk can be significant in the short term, it becomes lower in the long term. That’s why you should plan to hold on to any stocks for a period of at least three to eight years.
Many financial advisors recommend against picking individual stocks. Mari Adam, a certified financial planner and founder of Mari Talks Money, says if you take this option, it’s best to spread your risk among a couple of stocks and other investing vehicles.
“You don’t want to put all of your short- or mid-term cash in just one stock or one alternative,” Adam says.
Investors should remember the need to stay the course. You’re investing for the future, not just following the constant swings of the market.
“You really have to keep focused on what your goal is and don’t get distracted by what the market’s doing today or what’s on your statement today because if you do that, you get off that path and you don’t want to do that,” Adam adds.
2. Paying down high-cost debt
Earning a return doesn’t necessarily involve “investing” in the traditional sense. It can also involve getting rid of high-cost debt that might be dragging you down.
If you’re carrying a balance on a credit card with an interest rate of 20 percent from month to month, you’re going to be paying more than the interest you could accrue on a CD or any other traditional savings product. It’s much better to use your money to get that bill to zero than put it in a low-risk option that might pay 3 or 4 percent interest annually.
“Mortgages and a car note might be OK, but you should be paying down anything with a double-digit interest rate,” says Bill Hammer, Jr., president of Nashville, Tennessee-based Hammer Wealth Group.
Paying down credit card debt also protects you against rising interest rates in the future. And once the debt is paid down, it will be easier to put away money on a regular basis and build up your savings.
“Paying down debt is one of the only ways you can get a guaranteed risk-free return,” Hammer says.
Types of high-cost debt can include:
- Credit card balances
- Private student loans
- Personal loans
- Home equity loans
- HELOCs
- Some auto loans
3. Peer-to-peer lending
While you want to pay down your debts, others like you might need to borrow some money. Peer-to-peer lending, often known as “P2P lending,” is a creative option if you’re willing to take a little risk for higher reward, Foss says. Consider Prosper, which lets you make loans to random strangers and earn a good annual return. Prosper’s data shows that individual investors earned average annual returns of 5.3 percent.
You can lend to borrowers in different risk categories based on their credit scores. Just as a bank can charge a higher interest rate for those with lower credit scores, you get a higher interest rate for agreeing to loan to individuals with less-than-perfect credit.
Foss says it’s a less risky option than the stock market. She recommends sticking with borrowers who have AAA ratings.
“I wouldn’t put all of your cash here, but it might work well as part of a portfolio with dividend-paying stocks and a short-term corporate bond fund,” Foss says.
4. Bond funds
Short-term bond funds are another alternative to investing in CDs. Funds can give you exposure to bonds with similar terms such as 1-year and 3-year maturity dates, and they hold bonds in everything from foreign countries to utilities to corporations.
Another option could be an international bond fund. Many of these funds hold bonds from AAA-rated creditworthy nations and major companies. There are also emerging market bond funds, although these carry bigger risks. As you get started, read Bankrate’s guide on how to invest in bonds to educate yourself on the wide range of options.
5. High-yield savings accounts
Like a CD, the money you deposit into a high-yield savings account enjoys FDIC protection, provided your balance doesn’t exceed $250,000 (or $500,000 on a joint account). A high-yield savings account is a good option if you’re looking to earn a nice return on a short-term basis given where interest rates are today. Over time, though, you’re likely to earn a better return with a stock portfolio.
While CDs often pay higher returns than high-yield savings accounts, this is not always true. Some banks offer exceptionally competitive rates, and during periods when interest rates are falling, high-yield savings accounts can offer superior returns. That said, you’re not guaranteed a specific return in a high-yield savings account like you are with a CD.
CD vs. money market account vs. Roth IRA
Trying to choose between a CD, a money market account and a Roth IRA? The right answer depends on how you’re planning to use the money you’re stowing away.
If you’re looking for a place to park your emergency funds, for example, you’re probably better off putting it in a money market account, Adam says. That way, you can withdraw it as soon as you need it without concerns of a penalty. You’ll earn a little bit, too, but nothing to write home about. In the current climate, the best money market rates offered by online financial institutions are sitting around 4.3 percent. However, money market account rates at traditional banks are much lower, often less than 1 percent.
A CD might be a good place for cash you’re saving for a near-term goal. But it’s not a good place for long-term retirement funds. Those kinds of savings should go into a retirement account instead, like a Roth IRA.
Here’s how to weigh these options:
| Savings tool | Who it’s best for | Main benefit |
|---|---|---|
| CD | People with near-term savings goals | Risk-free returns |
| Money market account | People who want easy access to their money | Flexibility |
| Roth IRA | Retirement savers | Tax-free investment gains and withdrawals |
Best returns for short-term and long-term funds
A CD is just one option if you’re looking for a place to stash your short-term funds. There are a variety of alternative options, especially if you’re looking for a higher rate of return and are willing to accept the trade-off with a higher risk. Besides municipal bonds and short-term bond funds, you could earn a higher yield by investing in a mutual fund. Depending on how you invest your money, you could end up with a yield in the double-digits.
For your long-term funding needs, you’ll need to look beyond CDs.
“CDs aren’t always the right choice, especially if you won’t need the funds for several or more years,” says David Sterman, CFP, president and CEO of New York-based Huguenot Financial Planning. “Funds that focus on longer-term bonds will always offer better yields than CDs.”
FAQs
— Maurie Backman contributed to an update of this article.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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