Why settle for 5%? Consider These 3 Investment Options Beyond CDs

If you’ve been basking in the sun of high savings APYs, you may be disappointed that the Fed has started cutting rates. However, I would argue that change is actually an opportunity. The best CDs offer rates around 5%, which is solid. But these bets can distract people from other higher-paying investments.

Depending on when you might need to touch your money, here are three of the best places to keep your cash.

1. Invest in the S&P 500 Index.

There is a difference between investing and saving. Investing is riskier but has the potential to yield higher returns over time. For example, the S&P 500 index, which tracks the performance of the 500 largest U.S. companies, has delivered an average annual return of about 8%.

If you were to invest $1,000 a month for 30 years, the ability to earn an annual return of 8% would give you more than $550,000 more than a CD with a 5% rate.

Savings is a safe place to store money that you may need in the near future. Both saving and investing are necessary if you want to create wealth. So before you invest, make sure you have three to six months of living expenses in a high-yield savings account. Think of it as your safety net in case something goes wrong.

Looking for a high-yield savings account to store your emergency fund, but don’t know where to start? Check out this list of our favorite high-yield savings accounts. to open one and start saving today.

Once you get the hang of emergency savings, look into ETFs that track the S&P 500. The index has a good track record, and you don’t have to worry about picking individual stocks. ETFs are often a great low-fee way to gain exposure to a specific index, industry, or other asset group.

2. Invest in REITs

REITs are companies that own and operate income-producing real estate. They focus on different types of properties such as offices, shopping malls, data centers, etc. They offer a way to invest in real estate without having to take out a mortgage and take care of the property.

The great thing about REITs is that they must pay out at least 90% of their taxable income to investors in the form of dividends. According to NAREIT, the average dividend yield of all equity REITs in 2023 was 3.9%. Dividends are paid separately from any investment profits (or losses).

Not all REITs were created equal. Before you get started, research different segments of the industry and look at the performance of individual trusts. In addition to profitability, consider factors such as how much property the trust owns and who runs the company.

3. Pay off high-interest debt

Strictly speaking, paying off debt is not an investment. But few investments can guarantee returns of 20% or more. Data from the Federal Reserve shows that the average annual interest rate on credit cards on interest-paying accounts exceeds 23%. If you’re paying a lot of interest on your credit card, paying off the balance is one of the best investments you can make.

According to the Federal Reserve Bank of St. Louis, nearly 50% of Americans carry a balance on their credit cards. If you are one of them, decide how you are going to pay off this debt. Review your expenses and calculate how much you can realistically save each month to pay off your debt.

You can prioritize paying off cards with the highest interest rates (called the debt avalanche method). Another way, called the debt snowball method, is to focus on the smallest balance first to gain a psychological victory when it is paid off. It’s also worth seeing if debt consolidation can help lower your interest rate and make payments easier.

Once you pay off your credit card balance, you’ll have more available cash to spend on your savings and investment goals.

Bottom line

Every investor has their own risk tolerance. The investments above may have good and bad years, but they have also proven to outperform savings accounts over time. The biggest risk of all is waiting on the sidelines while earning decent bets on the CD. If you want to build wealth, you need to do more than just beat inflation.