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.
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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.
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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.
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. 7 Bank failure is also a risk, though this is a rarity.
Is it smart to put money in a CD? ›
CDs are good for medium-term savings goals. The best CD rates tend to be at online-focused institutions. High-yield CDs in recent years have reached 4% to 5% annual percentage yields, which might be enough to keep better pace with inflation than regular savings accounts can.
What's one tip for investing in CDs? ›
The key is to shop around and find the right CD to match your needs and timeline. Investing in CDs won't provide the long-term returns that you'll get from a diversified investment portfolio, and taxes, inflation, and early withdrawal penalties can all end up cutting into your return.
Should I buy a 5-year CD right now? ›
If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
What is a downside of opening a CD? ›
Disadvantages of investing in CDs
As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty. The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD.
Can you ever lose money in a CD? ›
The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.
Why is CD not a good financial investment? ›
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
Are money CDs safe if the market crashes? ›
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Do you have to pay taxes on a CD when it matures? ›
If you purchase a short-term CD that matures the same year it was purchased and earn $10 or more, you'll have to pay taxes on it for that year. If the term of such a CD spans over two calendar years, you'll pay taxes on the interest you earn on two consecutive tax returns.
Is a CD better than a 401k? ›
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.
What does Warren Buffett say about CDs? ›
Warren Buffett famously deemed them “financial weapons of mass destruction,” and others compared them to taking out fire insurance on a neighbor's home. But the CDS market may be improving transparency in the stock and bond markets.
Do millionaires use CDs? ›
As for whether financial planners tend to recommend CDs for their wealthy clients? It depends. Certified financial planner Blaine Thiederman says CDs are low-risk but they also offer low returns. “If you're a high-net-worth individual, you've likely got a diversified portfolio already.
Are CDs worth it Dave Ramsey? ›
Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.
Should I lock in long-term CD now? ›
For example, if you don't need the liquidity generated through CD laddering, locking in a long-term rate could make more sense. While recent inflation data suggests that the Federal Reserve could wait a while to make rate cuts, experts still expect interest rates to start falling at some point in 2024.
How much will a $10,000 dollar CD earn? ›
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 rowMay 14, 2024
The roles of CDs in your portfolio
They offer a guaranteed return over a set period with no chance of market-based losses. In exchange, they offer less liquid access to your cash than a savings account and lower long-term returns than the stock market. For this reason, CD accounts shouldn't take up all your money.
