8 Higher-Paying Alternatives to CDs (And How to Get Started)

A certificate of deposit (CD) offers a safe way to earn interest on your savings. However, although CDs promise the alluring benefit of minimal risk, they won’t give you the highest return on your money.

In addition, today’s CD rates might be on course for a slow and steady drop, thanks to the Federal Reserve’s decision to begin lowering its target federal funds rate.

If you are looking for higher returns, you might want to look for alternatives to CDs that can help you build wealth. Here are some options that offer the potential for higher returns, although many also come with higher levels of risk than a CD.

Index funds allow you to track a stock market index, such as the Standard & Poor’s 500. This type of investment gives you access to a broad selection of companies.

When you invest in index funds, expect a lot more volatility than you would get with a CD. But along with the increased risk comes the potential for higher returns and the ability to get ahead financially.

For example, the S&P 500 has returned an average of over 10% per year since it grew to its current size in 1957.

Many financial services companies sell index funds, including industry giants such as Fidelity and Vanguard. So, getting started with this type of investment is easy.

Real estate investing offers another way to put your funds to work. You can buy a property and rent out the space to others. Being a landlord comes with a lot of challenges, but it also offers the potential for big rewards.

How much profit you can make depends on many factors, including the location where you buy the property and the amount of rent you are able to charge.

If you plan to invest in real estate, it might help to read a few books on the subject and to begin saving for a down payment.

If you like the idea of investing in real estate but don’t want to commit to becoming a landlord, consider a real estate investment trust (REIT). A REIT gives you the opportunity to hold shares in a company that owns income-producing real estate.

As with any investment, there is the risk of loss when you put your money in a REIT. Carefully consider this reality before putting your hard-earned cash to work.

The same companies that sell index funds are likely to offer REITs.

A dividend is a distribution of profits from companies to shareholders. Some companies are famous for paying steady dividends to their investors year after year. If you purchase dividend-paying stocks, you can create an income stream.

The catch is that companies aren’t required to make a dividend payment. When you purchase a dividend-paying stock, there is always a chance you won’t receive dividends, even if the company paid them out in the past.

Also, remember that you can lose money on the underlying stock. To get started buying dividend-paying stocks, you will need to open a brokerage account with a financial services provider.

Peer-to-peer lending lets you loan out money to others with an expectation of receiving your funds back with interest. Most people who try their hand at this type of investment use a platform specially dedicated to offering peer-to-peer lending opportunities.

For example, Prosper is a platform that offers peer-to-peer lending. The company says that historically, the average annual return of its loans is 5.5%.

Keep in mind that there is always a risk you will not be paid back and will lose your money.

Target-date funds can be a good option for folks who want to invest in the stock market, but don’t want to think about rebalancing their investments each year. With this type of fund, you consider the year you would like to retire, then choose a target-date fund corresponding to that date.

As you get closer to retirement, the investment mix automatically grows more conservative, exposing you to less risk.

For example, if you want to retire in 2060, you can invest in a 2060 target-date fund. As you approach retirement, the fund increasingly will shift its focus from stocks to bonds to provide more stability and a lower level of risk.

Many investors consider gold to be a hedge against inflation. If you are looking for a way to store value for the long-term in a relatively liquid asset, gold can be one option.

An additional benefit is that gold historically has had a low correlation to the stock market.

If you opt to buy physical gold, make sure to keep it in a safe location. Also, note that gold isn’t a risk-free investment. The price can rise and fall, which means you could lose money.

If you hold high-interest debt — such as credit card debt — it can quickly drain your finances.

For example, if you are carrying a credit card balance with a 20% interest rate and your CD options only pay 4%, it might make sense to get out of debt before sticking funds into a CD.

Eliminating high-interest debt from your balance sheet can transform your financial situation. With expensive debt out of the picture, you will have more breathing room to save money and build wealth.

Plus, there is virtually no risk involved because you are sure to lock in savings when you commit to paying down debt ahead of schedule.

A CD offers a relatively risk-free way to grow funds slowly over time. But generally, returns on CDs are low compared to what you can get from other investments.

If you are willing to take on extra risk in hope of bigger returns, you might consider some of the options on this list.

Or, you can stick with safe CDs and try to compensate for their modest returns by finding a part-time job or side hustle that lets you earn extra income.