Should you buy a CD or invest in the stock market? Here’s how to decide

If you have some extra money and want to use it wisely to improve your financial future, you have several choices on where to invest it. One option is to invest in the stock market by placing your funds in a brokerage account. Opening a certificate of deposit or CD account is another option.

Both options have pros and cons, so ask yourself these key questions to help you decide which option is right for you:

1. Can you afford the risk of losing money?

Investing in the stock market carries some risk. The details of the investments you make and your investment timeline will determine the level of risk you take on. However, even with relatively safe investments, there is always the possibility of losing money.

If you invest in a certificate of deposit, you don’t have to worry about that. CDs are FDIC insured. This means you are guaranteed no loss on your CD within the FDIC insurance limits. Now you ~can do There are penalties if you voluntarily decide to withdraw money from a CD before its term expires, but you are in control of whether you do so, which also avoids potential financial risk.

If you absolutely can’t risk losing the money you’re investing, you shouldn’t invest that money in a house, for example, because you’ll need a down payment on a house that’s under contract in a few months. market. CDs are a better choice.

2. When do you hope to cash out your investment?

The next key question you need to ask yourself is when do you hope to access the funds you have invested and the returns you have earned.

If you invest in the stock market, your risk of loss is greater if you invest in the short term. Even really great investments can underperform for months, even years, if economic conditions are poor or the investment is poorly timed. Since you have a longer timeline, investing for a secure retirement is a better option.

For example, the S&P 500 is a financial index of 500 of the largest companies in the United States. Over the years, it has consistently generated an average annual return of 10%. But in some individual As you can see in the table below, there have been some major losses over the years.

Data source: Macrotrends.

If you plan to cash out your investment within 5 years, investing your money in the market is too risky because you could get caught in a recession and not have the luxury of waiting for a recovery, so you end up buying and selling at highs. low.

CDs, on the other hand, have many different terms. It’s common to find CDs that require a commitment for a period of time as short as three months, as long as five years, or a variety of periods within that range. So if you need money soon, but not right away, you should be able to find a CD that fits your timeline.

3. What are my goals for the fund?

Lastly, you need to think about your money goals. Do you want to maximize your returns while taking on more risk? Then investing in the stock market is the right choice. On the other hand, if keeping your money safe is your top priority, CDs may be a better solution.

Asking yourself these three questions can help you decide where your money should go. It is always best to consider your investment decisions carefully. Because you work hard for your money and it should work hard for you.

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