My times have changed! A while a go, I was looking at CD investment alternatives given they paid so poorly. Now, after an aggressive Fed rate hike cycle of 11 rate hikes since 2011, CDs are actually paying handsomely!
The good times for high CD interest rates will unlikely last, as inflation and interest rates come down. The Fed finally began cutting interest rates in September 2024. However, at the moment, CD rates are still relatively attractive.
In the past, CDs were a stable part of my overall investment portfolio. Whether it was a bull market or a bear market, I would always invest roughly 10% of every dollar saved in the longest CD possible since college.
The goal was to not only have some risk-free assets, but to eventually get neutral real estate by buying a place to live.
Although I lost around 35% of my net worth during the worst of the crisis in 2009, I knew that even if everything went to hell I'd have at least 20% of my net worth intact. The feeling was very comforting, especially when yields were over 4%.
CD Investment Alternatives
As CD interest rates come down again, I think it's prudent to invest in risk assets like stocks and real estate crowdfunding again. The demand for risk assets will increase.
Here are some other CD investment alternatives.
1) Refinance or pay down debt.
Refinancing a mortgage or locking in a new mortgage when you can lower your payments makes sense. There's a triple benefit to paying down your mortgage people don't tell you about. Although I could have made more money investing, I have never regretted paying down any of my mortgages in the past.
2) Treasury bonds.
An alternative to buying a CD is buying Treasury bonds. Treasury bonds are more tax efficient because you don't have to pay state or local tax. It's hard to beat earning a 4%+ risk-free return on Treasuries.
Personally, I'm very bullish on rental properties because the value of cash flow has gone way up. Further, real estate is a key component of inflation, which is currently elevated. Rents and real estate prices ride the inflation wave.
3) Search for higher online savings accounts.
It's interesting, but money market accounts are sometimes paying higher than CDs. If you want a place to keep your risk-free money, then look at an online bank for higher interest rates. CIT Bank has the highest yielding savings accounts I've seen.
4) I Bonds.
I Bonds were paying a healthy 6.89% guaranteed. The guaranteed rate will likely stay elevated through 2023. Unfortunately, you can only buy $10,000 worth of I Bonds per account. In 2024, the iBond rate is only 3.94%. Therefore, I'd rather invest in a money market fund or Treasury bonds yielding over 4.5%.
5) Invest in real estate.
My favorite CD investment alternative is real estate. As interest rates decline, the value of real estate increases. Real estate is a tangible asset that holds its value, provides utility, and generates income. For the majority of people, investing in real estate is the easiest way to build wealth.
You can either buy physical rental properties, as just mentioned, or real estate online. For example, you can invest in a Fundrise, that invests in residential property in the Sunbelt, where valuations are lower and yields are higher. As I get older, I enjoy investing more in 100% passive investments.
I spoke to Ben Miller, CEO of Fundrise, and he and I both believe we're past the bottom of the real estate cycle. As a result, Fundrise and I have been heavily investing in real estate since 2H 2023. So far, I've invested over $270,000 in Fundrise.
6) Venture capital
If you don't need liquidity and want to go up the risk curve, check out the Fundrise Venture product. It invests in private growth companies in AI, property tech, data infrastructure, and fintech.
What's great about the fund is that the investment minimum is only $10 and you get to see the portfolio composition before making an investment! Personally, I'm trying to get as much artificial intelligence exposure as possible.
Here's my conversation with Ben Miller about the Innovation Fund and investing in private AI companies.
Always Remember Everything Is Relative In Finance
When looking at CD investment alternatives, it's good to realize everything is relative in finance.
When you have the 10-year treasury bond providing a ~3.4% return, your hurdle rate is very low. There is a good chance a monkey can randomly choose 10 stocks to build a portfolio that will beat these returns if history is any guide.
The dividend yield of the S&P500 alone is around 1.6% for goodness sake. The 10-year bond yield is the hurdle you need to beat to make an investment worthwhile. Otherwise, why bother taking any risk when you can earn 2.9% a year risk-free.
My conservative investment target return has always been around 2-3X the risk free rate of return. In other words, if you are to put your money at risk, you should expect at least a 6.8% return or higher over a year.
Why You Might Not Want To Invest In CDs Today
- Not tax efficient
- Inflation rate is still higher than the best CD rate
- Locking up money for years reduces your liquidity
- The S&P 500 dividend yield is around 1.8%.
- Private real estate funds like the ones from Fundrise are providing a ~8%-16% returns due to lower valuations in the heartland of America.
- Another bull market could be on the horizon once the Fed starts cutting interest rates again
Detailed Overview Of CD Investment Alternatives
Here are the most logical and risk-appropriate CD investment alternatives today. Remember, you invested in a CD because it is risk-free/low-risk. Therefore, you want to be objective in your CD investment alternatives.
Let's look at the CD alternatives in a little more detail.
1) High Interest Savings Account.
For those who are absolutely risk adverse, investing money in a high yielding online-only savings account is the safest move. For example, you can earn great rates at CIT Bank in both their Platinum Savings and Savings Connect accounts.
The reason why bricks and mortar banks can't offer as high of a rate than banks like the online banks is due to much larger overhead costs
2) The Stock Market / Dividend Stocks.
Investing in the stock market is the riskiest CD alternative, but it's also straightforward thanks to retirement savings vehicles such as the 401k, IRA, as well as online brokerage accounts. Investing in the stock market is not a comparable alternative to risk-free CD investing at all as we learned during the recession.
That said, low interest rate returns on CDs force us to take more risks. So far, the S&P 500 has gone up massively since February 2009. The question on every investor's mind is: how much longer will the good times last?
10% of my net worth is in CDs because I'm content with 4% risk-free returns. 35% of my net worth is in real estate because although real estate is a fantastic way to build long term wealth, real estate is leveraged risk. You can read about my experience with private real estate over the past seven years.
No more than 35% of my net worth has ever been exposed to the stock market because the 1997, 2000, and 2009 implosions destroyed tremendous wealth and sent many friends to the poorhouse for going all-in at inopportune times.
One way to invest in the stock market is Empower, the original digital hybrid wealth advisor that leverages technology to customize an investment portfolio based off your risk tolerance. It's free to sign up and explore what type of investment portfolio they might build for you. You can link your existing investment accounts and manage your portfolio for free.
3) Debt Repayment Of Any Kind.
It's generally better to have less debt than more debt. If you have legacy debt that has a stubbornly high interest rate which cannot be lowered, then paying down debt is the safe alternative. Examples of legacy debt include student loans and mortgage rates at over 4% and any type of credit card debt, which averages above 12%.
There is a triple benefit to paying down your mortgage early. But before you do, justrRemember to always think in relative terms. Besides the economics of paying off debt, there's also a positive mental benefit as well. I paid off my 2.75% business school loan debt early because I simply found the debt annoying. Getting rid of the burden felt tremendously satisfying.
Do note that refinancing your mortgage to a lower rate is considered debt repayment. During the refinance process, a bank literally pays off your entire existing loan and gives you a new loan with a better rate in its place.
See the latest mortgage rates with Credible. They have one of the largest networks of lenders who compete for your business so you can get the best rate possible. Take advantage and see what's available today.
4) Bonds / Municipal Bonds.
Bonds have historically returned 3% – 5% and have also provided much less volatility than stocks. But bonds have also suffered from a decline in yields along with the long decline in government bond yields.
If you are in a 28% or higher federal income tax bracket and pay state taxes, you may want to consider investing in municipal bonds, which allow investors to earn federal and state tax free income. Just be aware that selling municipal bonds before maturity can be costly.
The risk of investing in bonds now is that rates are still low and inflation remains high. I'm personally buying a California municipal bond ETF, CMF, which provides a ~2.5% yield as part of my low-risk portion of my investment portfolio.
See: The Case For Bonds: Living For Free And Other Benefits
5) Real Estate Crowdsourcing.
Investing in real estate in cheaper parts of the country is currently my #1 focus for where I'm allocating capital to build more passive income so we can stay retired. Instead of investing hundreds of thousands of dollars in one specific property, I'm investing $20,000 – $50,000 in various commercial or residential real estate crowdsourcing deals.
My favorite platform is Fundrise, which has managed funds. It's free to sign up and explore. Fundrise manages over $3 billion for over 350,000 investors.
The average return for Fundrise platform investors has ranged from 8% – 10% a year for the past several years. During times of stock market volatility, Fundrise diverse eREITs tend to outperform.
Another great real estate crowdfunding platform is CrowdStreet. CrowdStreet focuses on individual real estate opportunities in 18-hour cities. 18-hour cities have lower valuations, higher cap rates, and higher growth rates. You can build your own select real estate portfolio with CrowdStreet.
The spreading out of America is real, especially after the pandemic. People want to live in lower-cost areas of the country and employers are letting them with the advancement in technology. Riding this investment trend is why I've invested $954,000 in real estate crowdfunding so far.
6) Venture Capital
Check out the Fundrise venture product if you want to invest in promising startups. The fund invests in private growth companies in AI, property tech, data infrastructure, and fintech.
What's great about the fund is that the investment minimum is only $10 and you get to see the portfolio composition before making an investment! 20 years from now I don't want my children asking me why I didn't invest in artificial intelligence.
You can also listen to my hour-long conversation with Ben Miller, CEO of Fundrise, about venture capital and why he's so bullish on artificial intelligence and more.
Saying Goodbye To CDs Is Not Hard To Do
When CD rates are low, we must look for CD investment alternatives. Perhaps if you are super risk adverse, already in retirement, and have no other passive income whatsoever, CD investing is appropriate. However even then, a 70 year old can find greater returns in often criticized annuities.
I also strongly encourage everyone sign up with Empower, a free online wealth management software, to keep track of your money. I used to manually update my net worth in an Excel spreadsheet once a quarter. Now everything is done for me so I can spend my time analyzing my overall net worth and making sure it is properly balanced.
My number one goal is to continuously grow my net worth in good times and in bad times. I'm bullish on the economic recovery. For CD investment alternatives, I plan to continue investing in stocks and real estate to take advantage.
Manage your money wisely. Nobody cares more about your money than you!
Related: Reinvestment Ideas Instead Of A CD. CD Investment Alternatives is a Financial Samurai original post.
Is it time to revisit CD’s 6month 2.1%?
Was reading your bonds article and talking with Fidelty on how to analyze bonds. Seemed so complicated (article didn’t help process). CD’s easy order, FDIC insured, short term hold wait until rates go up and repurchase at a higher rate by year end.
Great site overall! Would like more help on analysis but understand if that’s not your thing.
CDs and bonds are definitely looking more enticing now after the big rate increases since the beginning of 2022.
I had to laugh when you mentioned President Trumps policies damaging bonds. As we can see due to voter stupidity we new have Joe clueless Biden who is single handedly destroying the USA by giving free money, inviting every illegal immigrant/refugee in, and excusing everybody’s debt. I paid my school bills and all those with college debt need to do the same.
Nice site to keep up on investing ideas. Your answers seem very reasonable kind of like a Dear Abbey for different reasons of course. Thanks.
I am looking for advice on how to find an investor to loan me $30,000 with my house as collateral which has a market value of $400,000 and a 1st TD of $250,000. I will pay top dollar in interest.
Payback guaranteed by auto bank payments. This can be a balloon due in 12 months if desired.
Depending if this loan will be first or second lien?
I am retired and raising my great granddaughter she is three years old what can I invest two thousand dollars in that will grow the most interest for her when she turns eighteen? I just want to make sure she has some money to help her ,I am all she has.please can someone help me as I know nothing about investing,thank you ,
VTSMX
A much better alternative would be to buy a high dividend paying stock and sell a deep in the money call a couple of months out. You get the dividend, premium from the option, and almost no risk to the downside. If the option gets assigned, that’s good because that means you made money and can simply redeploy the cash in another option. This method has a significantly higher return and less risk than only owning a dividend stock. Today, I purchased KMI (paying 8.5% dividend) and sold a call 30% deep in the money expiring in 2 months. Within 2 months, I will get at least 4.5% return as long as the stock doesn’t decline more than 30%. After 2 months, I will redeploy the cash into another Deep In The Money Covered Call. I’ve have been using this method for years and have never lost any money. It is an amazing way to invest Cash. The only drawback is that no matter how much the stock price increases, you cannot make more than the original amount.
How did the KMI covered call trade work out?
Yes, you may not get the dividend when the extrinsic value of the call option is less than the dividend by ex-dividend date as the stock will be called away on ex-dividend date. The other downside is the call and bid spread for deep ITM call could be quite wide. I just ran some numbers on KMI example that you mentioned. For instance the current KMI closing price is $20.42. 30% deep ITM is approximately at $14 strike price. This call option mid price with Sept 20 expiry for this strike price is at $6.375 (Ask/bid at $6.4/$6.15) and the intrinsic value of this option is ($20.42 – $14 = $6.42). Could you help us understand how you get 4.5% return in two months?
You make some interesting points, but I still invest in CD’s. FDIC insuring my money is enough, and rates can only keep going back up!
Good info!
[…] Related: CD Investment Alternatives […]
How did you choose between Prosper.com and LendingClub.com?
I got to meet ip with Prosper representatives face to face a couple times in SF and therefore I went with them.
Hi Larry, I checked a couple credit unions here in SF, and some do have some good rates. I guess I can’t be bothered to physically open up an account given it’s so easy to open up an account online nowadays and transfer money. Call me 2013.
Not a bad place to park your money. Canadian CD / savings interest rates are higher than the US. Good luck!
What about an already mature Whole Life Policy? Many of the mutual companies (150+ Yr companies) are paying 5 to 7% dividends that (when used correctly) could be tax free.
Not sure Evan about whole life policies as I don’t have one. If you can get 5-7% tax free dividends, then that is huge. There must be a catch though.
Sam, have you written an article to compare the various brokerage accounts? I’m curious what you find in Etrade as compared to the alternatives. I haven’t used Etrade myself but if they have good research, etc, I would consider switching. I’ve been considering making a switch for awhile but I really havent made the time to analyze the options out there. When I choose my account 8 years ago, I didn’t have much to invest so I just choose my account pretty much randomly.
Hi Andrew, I have not. I’ve used Charles Schwab, Ameritrade, and E*Trade. I’m currently on E*Trade which works fine. They are all quite similar.
Sam,
Thanks for the CIT Bank recommendation. A 1% yield is amazing compared to what BAC or WFC were offering. Next step, figure out what to do with the Vanguard Total Bond Fund, which everyone is saying is about to blow up.
Marcel
It’s sad, but true. Everything is relative!
Earlier you said you were not a fan of bonds. Have you considered a short term investment grade bond fund? Some of these have been paying 4%-5% over the past few years and with the short term duration, you will not be hurt that bad by an unexpected spike in inflation.
My Credit union has something different but also a great way to get a “juiced up” return.
You put $500 a month into a special saving account and they pay 4% interest on the amount in this account. This not going to make me rich but it’s a little extra “free” money.
You must check out government I savings bonds. They are bought online at treasurydirect dot gov and are guaranteed to protect your cash from the ravages of inflation. The interest payments reset 2 times per year in accord with the inflation rate!
Will do. US Treasuries have been selling off recently, and the 10-year yield is now at 2.02% as of 2/13. I wonder if we’re going to see a massive bond sell-off.
We are still investing in CDs, even at these low rates. Yes, they barely keep up (or not) with inflation. Yes, the income for after-tax CDs is taxed as regular income. Yes, there is no opportunity for growth with CDs. My portfolio is heavily weighted to CDs and MM funds, because I intend to step off the work treadmill very soon, and cannot tolerate the risk of a 10% (or more) haircut. I am happy to allow my portfolio to slowly erode in value over decades, while eliminating the chance of getting slaughtered by Fed decisions, profligate Govt spending, declining dollar value, irrational herd mentality, spring-loaded inflation, etc. CDs are my only option at this point in time.
Stocks, Bonds, Real Estate, Gold, etc. all have big downsides which have been discussed in prior FS blog posts (and as Sam stated elsewhere, are not comparable to CDs). The disturbing thing about Stocks is that there is no longer a correlation between the economy and the Equity markets; this break in reality and predictability has discouraged us from further investment. Some of the posters appear to be newer investors, and I would like to point out 3 things: 1) The S&P 500 (75% of US stock market) returned exactly 0.0% for 2011, less the dividend. Yet all that money was at risk. 2) The S&P 500 is lower today than it was in 2000, 13 years ago. 3) The NASDAQ is 60% of where it was in 2000; $1 invested 13 years ago is worth 60 cents today, less dividends.
Those 3 things may bounce off investors happy with a 100% run-up in the past 5 years, and I am not encouraging anyone to take my path. Just wanted to explain why CDs are the best deal for me. One more thing, btw, I don’t understand the need/desire to build an Dividend portfolio of individual stocks; there are plenty of low-cost Dividend/Value funds that do this very thing and require very little care-and-feeding.
Thanks for sharing your viewpoint. Each person’s situation is different and this choice let’s you sleep best at night, especially what you mentioned before regarding your portfolio loss during the downturn.
So many folks were making fun of me for allocating 30% of my savings to 4% yielding CDs when the markets were going up. They said I wouldn’t keep up with inflation. Well, I’d much rather have a 4% guarantee than lose 30% of my principal in the market that’s for sure. Losing out to inflation is different from losing money!
As I understand it you will end up paying ordinary income tax on your structured notes gains. Is that correct? I vaguely remember reading once that that has to be the case if there is principal protection or something like that.
You are also exposed to credit risk of the issuer (generally a bank), so without going into priority of payments if your expected return on structured note does not exceed debt of that bank that is maturing at a similar point, it is probably not a good idea.
Correct. If you think Citibank is going bankrupt, then you probably don’t want to buy structured notes from Citibank. But if Citibank goes bankrupt, the world will probably return to chaos.
Quicken loans was ok and they’re quite nice, but my credit union had a better Apr so we’re going with them. Except we’re also reducing the length of the loan, so our monthly goes up but overall (we plan to rent this place out when we buy another) we spend 30k less. Our original mortgage was last April!
Next up: REITs
I’m very curious about P2P. I’d love to hear your results if you go in that direction. Right now, even though it is not completely passive, I would invest in real estate. It is incredibly cheap in my area and there will always be a large pool of renters due to socioeconomic reasons.
Real estate is great, but it’s not comparable to CD income because real estate involves more work and leverage. I’m trying to keep things as close to apples to apples as possible.
I think it all depends on what you want to do with the money. I would only invest parts of my emergency fund or some short term savings in a CD (although a high yield savings account might be a good alternative). Otherwise, I’d stick to dividend paying stocks.
I’m a little bit leery of P2P lending and wouldn’t feel comfortable with any more than 10% of my money invested there.
If I was particularly wealthy, I would look into structured notes.
I was leery about P2P lending for the first 5 years until 2012. It’s SEC regulated, defaults have dropped, and there is data showing positive returns from 2009-2012 e.g. during the financial crisis.
I started to move some money into TIPS a few years ago. I have a Vanguard fund that yielded 6.78% (2012), 13.24% (2011), 6.17% (2010) & 10.80% (2009). So far this year, it is slightly negative, but overall I like it as an alternative to CDs.
I’m a big CD ivestor myself. I don’t have any maturities coming up soon but I will definitely consider pulling my money out when the time comes. I find structured notes intruiging and can see myself going that route as a replacement. I don’t have the patience to put together and monitor a dividend stock portfolio. Thanks for the tips Sam.