If you're putting money into a short-term CD, such as a 1-year CD with a 5.00% APY, it can be fairly easy to visualize what will happen -- you'll simply get a 5% return on the money you put in.
On the other hand, it can be a little more difficult to visualize how much your money can grow over longer periods of time, especially if you're not familiar with the mathematics of compound interest. Don't worry, I won't turn this into a math lesson. But here's what you can expect if you open a 5-year CD in the current interest rate environment.
5-year CD interest rates in April 2024
While CD rates are generally at their highest level in years, it's important to realize that they can vary significantly from bank to bank. And it's also worth noting that just because a bank offers the highest CD rates doesn't necessarily mean it's the right fit for you -- it's important to consider other factors, as well.
For example, if you open a CD with the same bank where your checking account is, it can be extremely easy to move money to checking as your CD matures. And some banks allow you to withdraw the interest paid as you go, while others make you wait until the end of the term to withdraw anything at all. And that's not to mention that some banks have no minimum deposit requirements, while others might require as much as $2,500 to open a CD.
With that in mind, the rates offered by banks on our top 5-year CD rates list have APYs ranging from 3.75% to 4.30% as of this writing. There's no such thing as a perfect bank for everyone (that's why we have 10 different options on our list), so for the purposes of this discussion, we'll use the average APY, which is roughly 4.00%.
How much will a $10,000 CD be worth in five years?
Let's use the 4.00% APY as mentioned in the last section, keeping in mind that your 5-year CD may return more or less than in our example, depending on the particular interest rate you get.
If you deposit $10,000 into a 5-year CD and get an APY of 4.00%, this means that your money will earn $400 in the first year, giving you a year one balance of $10,400. So, you might think that if it earns $400 per year, you'll have a total of $12,000 after five years. But it doesn't exactly work this way.
CDs pay compound interest. In other words, since you ended the first year with $10,400, the second year will earn a 4.00% return on this new, larger balance (this is a good thing). Here's how the entire five-year term would play out:
In the first year, you start with $10,000, and end with $10,400 as previously explained.
In the second year, you start with $10,400 and earn 4% of this ($416), giving you $10,816.
In the third year, you earn $432.64, making your balance $11,248.64.
In the fourth year, you earn $449.95, giving you a balance of $11,698.59.
Finally, in the fifth year you'll earn $467.94, which produces an ending balance of $12,166.53.
If you don't like math, don't worry. The important thing to notice is that your interest gets larger every year, since there is more money in your account over time. Thanks to today's elevated CD interest rates and the effects of compounding, our hypothetical 5-year CD earned $2,166.53 in the five-year period. Not bad for a risk-free investment.
Is a 5-year CD right for you?
A longer-term CD isn't right for everyone. We've already discussed the advantages, including a guaranteed interest rate for half a decade, as well as the power of compound interest. But five years is also a long time to commit your money, so be sure that any money you put into a 5-year CD is money you truly won't need for at least five years.
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.
For example, a $10,000 deposit in a five-year CD with 3.50% APY
APY
Annual percentage yield, or APY, is a percentage that reflects the amount of money, or interest, you earn on money in a bank account over one year. APY includes compound interest. You can use a compound interest calculator to quickly see what you'll earn with a given APY.
would earn around $1,877 in interest. The same CD with a 1.50% APY would earn around $773 in interest, and the same CD with a 0.01% APY would earn only $5 in interest.
Let's say you put $10,000 into a 5-year CD with the rate discussed above – 4.75%. After the 5-year term is up you'll have earned $2,611 in interest for a total account balance of $12,611. That is a good rate of return for an option that comes with essentially zero risk.
The average 5-year CD yield is 1.43 percent APY, according to Bankrate's national index survey of banks and thrifts on Jun. 1, 2024, but Bankrate's team shopped around to find some of the best CD rates available nationwide. Compare these offers, then calculate how much interest you would earn when your CD matures.
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.
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
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.
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
A CD is a time deposit account, so you're making a commitment to keep your money in the CD for a set length of time. If you want to take money out of your CD before it matures, you'll pay an early withdrawal penalty. At many banks, the early withdrawal penalty is based on the amount of interest you earn in a day.
First, let's take a look at how much you could earn if you got the national average CD rate. Right now, the average interest rate for a 5-year CD is 1.46%. If you put $10,000 into a CD with that rate right now, after five years you'd have earned $751.63, for a total of $10,751.63.
Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.
If, for example, you opened a five-year CD with $10,000 on Jan. 1, 2024, that pays 4 percent APY, the $400 in interest you earn in 2024 will be taxable in that year. Interest earned in each of the remaining four years qualifies as income and is taxable in the year it's earned.
For example, let's say you invest $10,000 in a simple-interest account that earns 5%. You'll earn an estimated $500 in interest and your account will be worth $10,500 after a year.
Imagine you put $10,000 in an account that earns 5% APY, compounded annually. In the first year, you'd earn $500 (5% of $10,000).Now, your total is $10,500.In the second year, you earn 5% of $10,500, which is $525.
Depending on the bank, a $5,000 CD deposit will make around $25 to $275 in interest after one year. Online banks and credit unions pay appealing CD rates, and you can earn more interest than at big brick-and-mortar banks.
Hobby: LARPing, Kitesurfing, Sewing, Digital arts, Sand art, Gardening, Dance
Introduction: My name is Amb. Frankie Simonis, I am a hilarious, enchanting, energetic, cooperative, innocent, cute, joyous person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
