Why you should deposit $10,000 into a 5-year CD now (2024)

FAQs

Why you should deposit $10,000 into a 5-year CD now? ›

The interest is significant and predictable

It's safe and secure, plus the interest rates are generally higher than you'll get with other savings products. CDs can offer these higher rates because the saver agrees to keep the money in the bank for a predetermined period, generally between three months and five years.

A one-year CD with a $10,000 opening deposit that earns the Bankrate partner average yield of 4.94 percent would be worth around $10,494 when it matures in 12 months' time. This high-yielding one-year CD would earn you around $320 more in total interest than a CD earning the national average rate.

Compared to more volatile investment options, like stocks, a 5-year CD is a lower-risk choice. Your money is protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000, which means that your principal and interest earnings are secure.

They're federally insured for up to $250,000 and offer a safe place to put your money while earning interest. CDs are best for individuals looking for a guaranteed rate of return that's typically higher than a savings account.

What is the future value of $10,000 on deposit for 5 years at 6% simple interest? Hence the required future value is $13,000.

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.

Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.

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.

Should I lock in a CD now or wait? ›

The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.

Higher interest rates

A $500 deposit into a CD with 5.5% APY would only grow to $527.50 over 12 months. But a $1,000 deposit would grow to $1,055, and a $5,000 deposit would increase to $5,275.00. That's almost $300 more earned simply by moving your money out of one account and into another.

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.

CDs with terms longer than one year

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.

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.

"You don't want to use short-term CD's if you're investing for a goal that is longer than three years out unless you are incredibly risk-averse," Maula says. For long-term goals, you'll want a long-term CD, which would allow you to lock in today's interest rates for five or even 10 years.

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.