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

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.

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. CDs can also help you keep your money in savings, reducing the temptation of spending on unplanned purchases.

CD rates are at a 3-year high—but waiting longer to buy could be a gamble. Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed's rate hikes. The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022.

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD.

Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.

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.

Use Multiple CDs to Manage Interest Rates

Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.

If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.

Should I lock in a 5-year CD now? ›

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.

In exchange for handing over your money for a specified and longer term, you usually earn a higher interest rate. For example, a five-year CD can earn a higher (and guaranteed) rate than a typical savings account while still offering safety.

You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.

The average 5-year CD yield is 1.41 percent APY, according to Bankrate's national index survey of banks and thrifts on Jun. 7, 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.

For 3-year CDs: 90 days of interest. For 4-year CDs: 120 days of interest. For 5-year CDs: 150 days of interest.

Most CDs compound interest at a monthly or quarterly frequency, but some compound annually. The more frequently interest is compounded, the more you'll earn. Using the above example, say you invest $1,000 in a five-CD with a 5% annual interest rate, but this CD accrues compound interest.