Here's What Happens When You Open a CD Instead of Invest in the S&P 500

Not long ago, CDs felt like a financial relic -- something your parents used while their money earned almost nothing. Then interest rates climbed, and suddenly you can lock in 4%-5%+ returns with zero market stress.

At the same time, the S&P 500 has reminded everyone that investing isn't a straight line up. Some years feel great. Others feel like watching paint dry -- or worse.

CDs and the S&P 500 each do different things well. Neither is "better" in every situation -- so let's break down when to choose one over the other.

What a CD gives you that the S&P 500 doesn't

1. Guaranteed returns, no guessing

When you open a CD, you know exactly what you're getting.

If you lock in a 1-year CD at 4.00% APY, that's the exact return you will get after a year. A $10,000 deposit will turn into $10,400 upon maturity.

2. Stability and safety

With a CD, there's nothing to babysit. Since you're "locked in" for a set term, you're never wondering if today is the "right" day to sell or change strategies.

For people who value good sleep and fewer money decisions, CDs are a stable spot to keep funds.

From a safety standpoint, CDs have strong protection. Deposits at FDIC-insured banks are covered up to $250,000 per depositor, per bank.

3. A real chance to keep up with inflation

With today's higher rates, many top CDs can at least keep pace with inflation, which is hovering around 3% right now. This hasn't always been the case.

Yes, you'll owe taxes on the interest unless it's inside a retirement account. But even after taxes, earning a solid, known return beats watching cash slowly lose purchasing power in a low-yield account.

What the S&P 500 offers that CDs can't touch

1. Long-term growth that compounds hard

Historically, the S&P 500 has averaged around 10% annually over long periods. Not every year, or in a neat line. But over decades, it's been one of the most effective wealth-building tools available to regular investors.

A CD might have better returns in a single year. But investing in stocks usually wins over 20 or 30 years. And the difference is massive.

For example, if you invested $20,000 in a CD earning 3% for 20 years, you'd end up with about $36,000. Put that same $20,000 into the S&P 500 earning a long-term average of 10%, and you're looking at roughly $135,000 -- more than triple the outcome.

2. Inflation-beating power over time

CDs can keep pace with inflation in good rate environments. Stocks have historically gone much further -- often during inflationary periods, and especially over decades.

3. Flexibility and liquidity

Money invested in an S&P 500 index fund isn't locked up. You can add to it over time, rebalance when needed, or pull out partial amounts without penalties.

This flexibility doesn't matter much early on, when you're in wealth-building mode and contributing to a 401(k) or IRA. But for retirees -- or anyone actively drawing from their portfolio -- that access can be a big deal.

CDs, on the other hand, usually come with penalties if you withdraw money early.

A smart middle ground

Every money tool has a job it's good at. Problems usually pop up when we ask one tool to do everything.

For long-term goals like retirement and building generational wealth, stock funds like the S&P 500 are a great idea. Retirement accounts are where growth matters most, and where short-term swings matter least.

For shorter-term goals, predictability is better. CDs can make sense when you've got a clear timeline -- like for a home down payment, planned expense, or money you know you'll need soon.

And for cash that needs to stay flexible, high-yield savings accounts can be a great middle option, with strong rates and no locking up funds. Check out today's top high-yield savings rates to see what's available right now.