CD Rates Top 5% Right Now. But You Could Earn Double That Rate if You Do This Instead

CDs can be a good place to put your money, especially right now. There are risk-free CDs, some with no minimum balance requirements, that will pay you returns right around, or slightly higher than, 5.00%.

But read on to learn about another pretty safe investment that could pay you double what the most competitive CDs are offering.

You may want to do this instead of investing in a CD

If you want to take on minimal risk and stand a very sold chance of earning double what a CD will pay, here's what you can do:

• Open a brokerage account. There are plenty of them that don't require any minimum balance requirements and that don't charge you any monthly maintenance fees or fees for investing.
• Buy shares of an S&P 500 index fund, such as the Vanguard S&P 500 ETF (VOO) or the SPDR S&P 500 ETF Trust (SPY)

An S&P 500 index fund is a fund that tracks the performance of a financial index called the S&P 500. When you buy into one, you get a small ownership stake in 500 of the largest U.S. companies, including big names such as Microsoft, Apple, and Amazon.

You do not need any investment knowledge to buy an S&P 500 fund. The best brokers for ETFs make it super easy to find and buy them. And you don't have to worry about investment fees. Since the fund's holdings are just the 500 companies that are part of the financial index, the expense ratios (costs of investment) are extremely low.

And the S&P 500 has consistently, for decades, produced average annual returns of around 10%. Not only is that double what CDs are offering, but it's also a consistent great return over a longer time horizon.

While CDs are offering upwards of 5.00% now, they've provided much lower yields in the past. And yields are likely to go down in the future once the Federal Reserve (the U.S. central bank) lowers the federal funds rate, which is expected to happen later this year. To be clear, if you open a CD now, your rate is locked in for the duration of the CD term. But eventually, you'll have to renew your CD, and when that time comes, you likely won't find rates that still exist around 5.00%.

S&P 500 funds also present minimal risk if you have a long time horizon to invest. No one who has kept their money invested in one for 20 years has ever lost money.

Who is an S&P 500 index fund right for?

Should everyone thinking about a CD buy an S&P 500 fund instead? Not necessarily. That's because there's some risk with these funds. They aren't a sure thing like a CD, which is FDIC insured.

See, the S&P 500 can and does have some bad years -- especially if there's a big market crash or economic slump. History has shown it will eventually recover when it loses value. But if you put a lot of money in, a market crash happens soon after, and you then need to withdraw your funds a few months later, you might take a significant loss due to your poorly-timed investment.

To avoid this, you should put money into the stock market only if you aren't going to need it for around five years or longer. That time horizon should give you long enough to wait for a recovery if there's a downturn, so you don't have to sell at a loss.

If your time horizon is shorter than five years, look for a CD. The Ascent has a list of CDs offering the best rates. Some options include:

• Synchrony Online CDs, including a 6-month CD offering a rate of 4.80%, or a 12-month CD paying 4.80% APY.
• Capital One 360 CDs, including a 12-month CD paying 5.00%.

If your time horizon is five years or longer, sign up for a brokerage account and buy shares of an S&P 500 fund. Robinhood is a good choice due to easy mobile trading and the fact you can get started investing with as little as $1. There are also plenty of other brokers you can choose from, most of which allow you to open an account within minutes.

If you choose option two, you may be able to enjoy returns of double today's CD rates for decades to come.