Money Management

CDs can be a great way to establish a steady income stream, but they aren’t the best long-term investments for everyone. Here’s an alternative to consider. [[{“value”:”

CDs can be a smart way to lock in an interest rate and get steady income from savings that you aren’t likely to need for a while. However, they are best suited for income and aren’t necessarily a great way to build wealth over time.

As of this writing, it’s rather easy to find 5-year CDs with guaranteed APYs in the 4.00%-4.50% range from the top online banks. But for long-term wealth building, there’s no comparison between CDs and the stock market.

CDs vs. stocks

Getting a return of 4% or 4.5% from a 5-year CD is certainly a respectable amount of income, especially from a risk-free investment. For people under 35 years old who are reading this, the current CD interest rate environment is the best it’s been in your adult life.

However, if you’re hoping to build long-term wealth, there’s simply no more surefire way than the stock market.

You don’t need to buy individual stocks or find the next big trend to achieve excellent returns. Even opening a brokerage account and buying a basic index fund that tracks the benchmark S&P 500 index can be a surprisingly strong wealth creator over time. In fact, from 1965 through the end of 2023, the S&P 500 produced annualized returns of 10.2%

Here’s what this means. Let’s say that you have $20,000 to invest that you want to use to build a nest egg for the future. Even if you can get a 4.50% APY on 5-year CDs forever, this amount of money will compound to about $74,900 after 30 years.

On the other hand, simply using the 10.2% annualized return of the stock market, a $20,000 investment would grow to more than $368,000 over a 30-year period. And that assumes a one-time investment. Imagine if you added a few thousand dollars to your investment every year along the way.

Both investment types have pros and cons

To be sure, both CDs and stock market investments have pros and cons. The long-term return potential of the stock market is certainly an advantage, but the downside is that stocks can be rather volatile over shorter periods.

In fact, during the 1965-2023 period I mentioned earlier, the total returns from the stock market in a single year have been as high as 38% or as low as negative 37%. On the other hand, CDs have lower long-term return potential, but the value of your investment is 100% safe.

For this reason, financial planners (including myself) generally suggest that investors keep their assets in a mix of stock-based investments and fixed-income instruments, which includes CDs. One popular rule of thumb is known as the “rule of 110,” and says that if you subtract your age from 110, you’ll get the ideal percentage of your portfolio to keep in stocks, with the rest in fixed income.

For example, I’m 42 years old, so this implies that I should have 68% of my money in stocks, and the other 32% in fixed-income instruments.

The idea is that while you’re younger and have decades to let your money ride out the ups and downs of the market, that’s when the bulk of your money should be in stocks. On the other hand, as you get older and your focus becomes more about income than growth, that’s when instruments like 5-year CDs make the most sense.

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Debit cards are an important piece of any wallet, but their offerings are pretty basic. Check out some reasons why a debit card may not get much use. [[{“value”:”

I remember going to the bank with my parents one day during high school to open my very own checking account. I was a little overwhelmed by the responsibility of carrying a debit card around in my wallet. Here was the key to my own little vault, slim as a playing card. I felt very mature.

Fast forward a few years to when I opened my first credit card, and I had that same feeling all over again. A little nervous and a little in awe that I had the power to access all that money whenever I wanted.

As the years have gone on, my debit card has taken a backseat; in fact, it’s gotten a little dusty at this point because I hardly ever use it. Here are a few of the reasons why.

1. I like earning rewards with my credit cards

One benefit of a debit card over a credit card is that with the former, you can only spend the money you actually have. If you’re on a tight budget or prone to overspending, using a debit card can help you stay in line.

But if you consistently keep your spending in check and know you’ll be able to pay off any charges each payment period, using credit cards can be a boon to your finances. Many credit cards earn rewards, either in the form of cash back, points, or travel miles. This essentially makes everything you buy a little bit cheaper because you’re getting paid back a percentage of each purchase in one form or another.

Debit cards just can’t compete with that.

2. I feel safer with the protection from credit cards

Another benefit that credit cards offer is fraud protection. If you lose your wallet or your card information gets stolen, you can breathe a little easier knowing that you won’t be on the hook for all, or potentially any, of the fraudulent charges that might occur. The Fair Credit Billing Act limits your liability to $50 as a result of credit card fraud. And some of the best credit cards even have 0% liability.

If you drop your debit card on the street and some scoundrel goes on a shopping spree with it, you could be out a lot more. Depending on when you report the card as lost or stolen, you could be responsible for all of the money taken from your account.

3. I almost never pay with cash

Once I started using my credit cards regularly, I never went back to using my debit card to pay for purchases. That meant the only time I was using it was to take out cash. But these days, my ATM visits are few and far between.

According to the Federal Reserve, cash usage dropped to 16% of transactions in the U.S. in 2023. That drop is likely in part due to the COVID-19 pandemic, when we were all worried about any sort of contact and avoided exchanging bills and coins with strangers. Touchless card readers and paying with smart devices became more common, and it looks like I’m not alone in making that switch.

More benefits for my finances

There are plenty more perks to using credit cards, from purchase protection to credit building, that debit cards simply don’t offer. While I’m glad I got my financial footing under me with a debit card, I’ve mostly moved on to greener pastures.

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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.

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