Savings accounts are great for money you want to earmark for emergency expenses and near-term goals, like saving for a car, vacation, or house. But if you've covered those bases and have more unallocated cash on hand, you're left with an interesting problem -- how to generate the best return on your money for the long term.
One option is to invest it in a certificate of deposit (CD) with a five-year term. While in the past, 5-year CDs had generally lackluster returns, today's rate environment has made these deposit accounts far more lucrative. If you have a long time horizon and you want to earn a decent return on a safe investment, let's see how much $20,000 could make in a 5-year CD.
How much will $20K be worth in five years?
Before we get to the math, let's establish some ground rules. First off, the CDs mentioned below pay compound interest. That means, your CD rate not only applies to your initial deposit but also to the interest you've already accumulated. This is different from simple interest, which would just apply to your principal and not the interest you've already earned.
Secondly, we have to assume you won't withdraw the interest early. While many banks will let you take out interest periodically, doing so reduces your balances and will thus result in slightly less interest earned overall. Keep in mind that withdrawing interest is different than removing your initial deposit, which is against the rules and will likely result in paying an early withdrawal penalty.
Thirdly, the rates mentioned below are current as of April 21, 2024, but they could change at any moment. Check with the bank itself to see what its current rates are.
Now that we got those assumptions out of the way, let's take a look at how much you could earn with $20,000 in some of today's top-paying 5-year CDs.
| Bank | CD rate | Balance at the end of term | Total interest earned |
|---|---|---|---|
| Barclays Online | 3.75% | $24,042 | $4,042 |
| Ally | 3.90% | $24,216.30 | $4,216.30 |
| LendingClub | 4.00% | $24,333.06 | $4,333.06 |
| Bread Savings | 4.15% | $24,509.04 | $4,509.04 |
| Quontic | 4.30% | $25,686.05 | $4,686.05 |
Data source: Author's calculations
So, no matter which 5-year CD you choose, you're going to earn between $4,000 and $4,700 on a $20,000 deposit at today's best rates. Keep in mind, you have to pay taxes on CD interest, so your total return could be less. Still, this is a decent return for a relatively risk-free investment.
Should you open a 5-year CD?
A big reason to open any CD of any term is to freeze today's high interest rates. To be sure, today's best CD rates won't be around forever; in fact, by many expert predictions, banks might start lowering CD rates later this year. While no one can predict when CD rates will change, it might be prudent to lock one in before rates begin to shift.
As far as 5-year CDs go, these longer terms best suit those who have extra savings in another bank account, like a high-yield savings or checking account, and don't plan to use this money for the next 60 months or longer. Moving this money into a 5-year CD would entitle you to a decent return on your savings, one that could be substantially higher than what other bank accounts could pay over the same duration. It's entirely possible that in two to three years, the best savings rate will be less than half what it is now.
Ideally, this money shouldn't be already tied up in investments in a brokerage account, nor should it come from your emergency fund. Since 60 months is a long time to lock up your money, it should be savings you don't have earmarked for short-term goals.
All things considered, 5-year CDs are paying out at super generous rates. If you can commit some of your savings to one of these accounts, you can establish a decent stream of passive income. However, if locking your money up for the length of a presidential term plus a year scares you, don't sweat it -- take a look at some of the top-paying short-term CDs (like 12-month terms) and see if they might suit your time horizon better.
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