Certificate of deposit (CD) rates have risen over the past few years, making them an attractive option for people looking to grow their money. But figuring out how much to put into a CD and when it's the right time can be challenging. Here are a few things to keep in mind before you jump in.
RELATED: Best CD Rates
How much should you put into a CD?
The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time.
While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.
Once you have enough money saved for a minimum amount, the next step is to look at the current amount of cash in your bank account and your total investments to determine how much should go into a CD. For example, U.S. Bank says a general rule of thumb is for cash and cash equivalents (including CDs) to make up 2% to 10% of your portfolio.
Let's assume you have a total of $50,000 of investments and cash. In this scenario, you may want to put $2,500 -- 5% of your $50,000 -- into a CD. Keep in mind that you don't want to put all your cash into a CD.
What money should go into a CD?
A CD is a safe place to store some of your money so it can earn you more money. But it works differently than a high-yield savings account.
With a savings account, you can generally take out the money when you want to, without a penalty. Savings accounts give you more flexibility but typically earn a lower rate of return. But when you put your money in a CD, you're agreeing not to touch the cash for a set amount of time -- sometimes for up to 5 years -- while you earn a predetermined rate on the money you put into it.
In exchange for handing your money over for that time, you receive a higher interest rate.
What money shouldn't go into a CD?
A CD isn't the place to build an emergency fund, and it's not for retirement investing. Most financial experts recommend having at least $1,000 in an easily accessible emergency savings account. Ideally, you want to eventually build that amount up to three to six months' worth of your living expenses.
A CD isn't the place to keep this money because you won't be able to easily access it during an emergency. CDs often charge fees for withdrawing money, while savings accounts generally do not. If you need cash to fix your car or replace a broken appliance, you want easy access to your money and no penalties for withdrawing it.
Plus, a CD isn't the place for you to put your retirement money. A CD generally won't earn enough to build a retirement nest egg, so it's best to put that money into a brokerage account where you can buy stocks and index funds.
Dip your toe in first
Like any major financial decision, it's best to move slowly. It may be a good idea to put a small amount of money into a six-month CD to learn how it works, how you earn interest, and how you feel about having your cash temporarily committed to a CD.
And if you don't like having some of your money in CDs by the end of six months, at least you'll have earned some interest and learned something new along the way.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
FAQs
The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time. While that amount will be different for everyone, you should keep a few things in mind.
What is a good amount of money to put into a CD? ›
The amount of money you should put in a certificate of deposit (CD) depends on numerous factors, ranging from how much you have to invest to how much the bank requires. You must typically make a minimum opening deposit, usually between $500 and $2,500, although some accounts don't have this requirement.
Why should you put $5000 in a 6 month CD now? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Why should you deposit $10,000 in a CD now? ›
The top nationwide rate in each CD term—from 6 months to 5 years—currently ranges from 5.20% to 6.18% APY. With a $10,000 investment in a top-paying CD, you can earn hundreds to thousands of dollars of interest on your money—and much more than if you keep it in a typical savings account.
What is the biggest negative of putting your money in a CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers.
How much is too much to put in a CD? ›
Ensure your CD deposit and the expected interest will total less than the $250,000 limit. Open CDs at different banks or credit unions. This approach might take more work, but you can utilize CDs at different rates and terms.
Is it better to have one CD or multiple? ›
Use Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
Is it smart to put money in a CD now? ›
Is it worth putting money into a CD? For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.
Should I buy a 12 month CD? ›
A shorter-term CD could help you take advantage of interest rate hikes. You could get hit with an early withdrawal penalty. Unless you have enough in liquid savings to fund emergencies, tapping your one-year CD before the term is up could cost you an early withdrawal penalty.
What if I put $20,000 in a CD for 5 years? ›
How much interest would you earn? If you put $20,000 into a 5-year CD with an interest rate of 4.60%, you'd end the 5-year CD term with $5,043.12 in interest, for a total balance of $25,043.12.
Early Withdrawal Penalties
The most common way people lose money through a CD account is by withdrawing their funds before the term ends.
Why is CD not a good financial investment? ›
CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.
Do you pay taxes on CD interest? ›
Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Is it better to put money in a CD or savings? ›
A certificate of deposit offers a fixed interest rate that's usually higher than what a regular savings account offers. The tradeoff is you agree to keep your money in the CD for a set amount of time, typically three months to five years.
Should I put all my money into a CD? ›
Bottom Line. CDs can be a safe way to earn a little interest on your savings over a set period of time. But don't put more money in CDs than you can afford to lose access to for the length of the CD's term. Once your money is in a CD, you generally can't touch it without penalty until it matures.
How much will a $500 CD make in 5 years? ›
This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.
How much does a 10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 1.81% | $181 |
| 2 years | 1.54% | $310.37 |
| 3 years | 1.41% | $428.99 |
| 4 years | 1.32% | $538.55 |
1 more rowThat said, here's how much you could expect to make by depositing $20,000 into a one-year CD now, broken down by four readily available interest rates (interest compounding annually): At 6.00%: $1,200 (for a total of $21,200 after one year) At 5.75%: $1,150 (for a total of $21,150 after one year)
How much money do you make on a $5000 CD? ›
How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.
