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MoneyWatch: Managing Your Money
By Joshua Rodriguez
Edited By Angelica Leicht
/ CBS News
You may be aware that deposit accounts now offer impressive returns due to the Federal Reserve raising its target federal funds rate more than 10 times in the last couple of years. The federal funds rate forms the foundation for the interest rates financial institutions offer these accounts — and since the Fed's rate is up, today's returns are hard to ignore.
And, one of the best ways to take advantage of today's high interest rate environment is to open a certificate of deposit (CD). CDs offer a safe way to store your idle cash, and thanks to the Fed's aggressive rate increases, today's best 5-year CDs are payingnearly a 5% return on your investment. So, how much money can you make by investing in a CD? Let's do the math to find out.
Open a CD now to lock in today's impressive returns.
How much would a $5,000 CD make in 5 years?
The amount of money you can make on a $5,000 CD over five years depends highly on where you open your account.
"Online banks are able to pay significantly higher interest rates" than their brick-and-mortar counterparts, says Gary Zimmerman, founder and CEO of MaxMyInterest. That's "because they have a lower operating cost structure. Without having to pay for expensive branches, online banks can afford to pass those savings directly onto you via a higher interest rate."
However, it is important to compare all of your options — online and otherwise. Online banks typically offer the highest CD rates, but there are some exceptions to the rule. That's especially true for credit unions.
Right now, Bread Savings, Popular Direct and SchoolFirst Credit Union offer some of today's top 5-year CD interest rates. Here's how much money you'll earn on a $5,000 5-year CD at each of these institutions:
- Bread Savings at 4.75%: $1,305.80 (for a total of $6,305.80 after five years)
- Popular Direct at 4.70%: $1,290.76 (for a total of $6,290.76 after five years)
- SchoolFirst Credit Union at 4.60%: $1,260.78 (for a total of $6,260.78 after five years)
Keep in mind that your returns are dependent on the amount of money you deposit into your CD, but you don't have to deposit $5,000 to earn a meaningful amount of interest. Here's how much you could earn by depositing $1,000 into a 5-year CD at each of these institutions instead:
- Bread Savings at 4.75%: $261.16 (for a total of $1,261.16 after five years)
- Popular Direct at 4.70%: $258.15 (for a total of $1,258.15 after five years)
- SchoolFirst Credit Union at 4.60%: $252.16 (for a total of $1,252.16 after five years)
Open a CD today to earn hefty returns on your money.
Other reasons you should invest in a CD
The fact that you can earn an impressive return on your investment is a good reason to open a CD, but it's not the only reason to do so. Some other benefits of opening a CD include:
Safety
"Certificates of deposits offer the conservative investor safety of principal, predictable returns and stable interest income," says Mark Fried, Wealth Manager and Partner at Merit Financial Advisors. So, CDs are a safe investment opportunity. That's especially true when you consider that these accounts generally come with FDIC or NCUA insurance of up to $250,000 per depositor, per account.
Lock in strong returns
"It's simple," says Michael Arvay, founder and CEO of Marvelous Retirement Planners. "CDs are used for what some might call 'lazy money' or money you won't need for a while." That's because CDs offer a guaranteed rate of return for a period of time.
When you open a CD, you lock in its interest ratefor the entire term of the account. So, if you open a 5-year CD now and rates fall next year, you'll continue earning a return at the high interest rates institutions are paying today through the end of your 5-year term.
Plan for upcoming expenses
CDs are also a great way to plan for upcoming expenses.
"For example, someone who says they're taking a vacation in a year and wants to add some value to their vacation funds might put some money in a nine- or 12-month CD at a local credit union or depository," Arvay says.
After all, in doing so, the saver is able to earn a predictable return without any risk of loss. So, by storing their vacation money in a CD, they're able to add a bit to their spending cash for their trip.
Use a CD to plan for your upcoming expenses today.
The bottom line
Today's leading CD options are paying a meaningful rate of return. However, the current high-rate environment isn't likely to last forever. Invest $5,000 into a 5-year CD now to lock in impressive returns before rates start to fall.
