Here’s what happens when you put too much money into a CD

CDs have been a popular choice for savers this year due to their impressive prices. For much of 2024, it was easy enough to secure a CD at 5%.

It’s harder to find 5% CDs right now. But CD prices are still pretty impressive, with many paying well over 4%. It’s not too late to jump on the CD bandwagon if you haven’t done so earlier in the year.

At the same time, you don’t want to make the mistake of putting too much money into a CD. If you overdo it, you could actually miss out on better returns elsewhere.

Be careful with CDs

A CD is a great place to grow your money in the short term. If you’re saving for a home and want to buy one in 2027, now is a good time to open a 12- or even 24-month CD.

However, you should limit the amount of money you put into a CD to the amount you expect to need in a few years. If you expect to keep the money for many years or even decades, you should probably invest it instead.

While you might get close to 5% from a CD today, you should know that the S&P 500 has rewarded investors with an average annual return of 10% over the past 50 years. This 10% is due to years when the market was surging, but also years when it was losing.

This shows us that you can make a lot of money by investing in a broad market index like the S&P 500 over a long period of time. Putting too much money into a CD may limit your returns.

Investing for the long term can make a big difference

Let’s say you plan to pay $40,000 for a house that you want to buy in 2027 because you’ll still be in college by then. And you currently have $45,000 in savings in addition to what you need for the emergency fund. One might assume that it makes sense to put the entire amount on one CD. But it’s better if you limit your CD to $40,000 and invest the remaining $5,000 in a stock portfolio.

If you earn a 10% annual return on your $5,000, your investment assets will be worth about $54,000 in 25 years. If you wait two years to invest your $5,000, it will only be worth about $45,000.

And yes, you will earn something on that $5,000 if you put it on a 24-month CD. But at 4.5% you’re looking at $460. That doesn’t make up for the $9,000 difference between investing your $5,000 now and investing it in two years.

Don’t overdo it

CDs are a great way to make a little extra money in the short term. But if you put too much money into a CD, you limit the amount you can earn with your money. Be careful if you open a CD today because even though interest rates are still quite high, they pale in comparison to the returns you could earn in the stock market.

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