With a certificate of deposit (CD), you’ll earn a guaranteed rate of return on your hard-earned cash, helping you grow your savings, risk-free. Putting your cash in a CD can help you earn hundreds of dollars in interest, with zero effort on your part.
If you put just $500 in a five-year CD with one of the highest APYs on the market, do you know how much you'll earn? It might be more than you'd think, considering all you had to do was "set it and forget it."
Keep reading to learn more about what CDs are, and how much you could earn by saving your cash in one.
If you put $500 in a CD for 5 years, here's how much money you'd have
How much money will you earn with a CD?
If you put $500 into a 5-year CD, here's how much you'd earn, based on some of the best rates available today.
BMO Alto
APY: 3.90%
Interest earned: $105.41
Total balance: $605.41
Pima Federal Credit Union
APY: 3%
Interest earned: $79.64
Total balance: $579.64
Lafayette Federal Credit Union
APY: 3.70%
Interest earned: $99.60
Total balance: $599.60
By saving in any one of the above CD accounts, you'll earn over $75 by the time your CD matures — all you have to do is open the account and wait. Try our savings calculator to see how much you’ll earn depending on different deposit amounts and maturity dates.
What is a CD?
A certificate of deposit, or CD, is a type of savings account that holds a fixed amount of money for a fixed period of time, typically ranging anywhere from three months to five years. They can range from so-called time-deposit savings certificates — available in modest denominations at banks, savings and loan associations, and credit unions — to negotiable certificates requiring minimum deposits of $100,000 or more.
In many cases, CD accounts offer higher savings rates than standard savings accounts, but there is a caveat. If you withdraw your money before the CD’s maturity date, you’ll incur a fee, offsetting any interest you may have earned (unless you have a no-penalty CD account).
Typically, the longer the CD term, the higher the annual percentage yield (APY). However, the market is currently experiencing what is known as an “inverted yield curve,” meaning you’ll earn more from a 1-year CD compared to a 5-year CD. Currently, many of the top-yielding CD rates are over 4%.
Unlike high-yield savings accounts, you’ll lock in rates when opening a CD account. This means that if rates go up or down, the APY on your account will remain the same.
Use the below tool — powered by Bankrate — to compare CD rates today.
Before opening a CD, make sure to compare interest rates, early withdrawal penalties and if there’s any other fees associated with the account. Some accounts have minimum deposit and balance requirements that if not met, could result in a charge.
Also watch for the rollover provision. In some cases, the certificate will automatically be rolled over (that is, another certificate purchased for you) if you don't notify the institution within a specified number of days before the certificate's maturity.
Why open a CD?
Because your cash is locked away for a fixed period of time, avoid putting your emergency fund, or any other savings you may need to access, into a CD account. Instead, CDs are good options for particular savings goals, like future purchases or events.
For example, if you’re planning on buying a car in three years, then keeping your cash in a three-year CD makes sense, as it will help you maximize your savings until that time comes. You’ll have less of a temptation to spend this cash, as you'll have to wait until the account's maturity to withdraw funds or incur a fee.
If you don’t have a particular savings goal in mind, you’ll need to consider when you’ll need access to your cash and plan accordingly. Or, you can opt for a no-penalty CD account, letting you avoid early withdrawal fees altogether, but usually at the cost of a lower APY.
"The first question to ask is the expected time horizon. If you’ll likely need the cash in 2 years, a 5-year CD is not the best option if there is a penalty for early withdrawal. If you have a 5-year time horizon and think interest rates are going to decrease in the next 12 months, a 5-year CD may be best so that you're locked in at the (hopefully) higher rate," Michael Powers, financial planner at Manuka Financial, told Kiplinger.
"If you have a 5-year time horizon and expect interest rates to increase," he continued, "you may want to stick with a shorter-term CD (or even better, a no-penalty CD) and then if rates do increase, you will (hopefully) be able to reinvest in a new CD that pays a higher rate."
If you’re looking for a risk-free investment option and want to earn a fixed, predictable rate of return on your savings, saving your cash in a CD account is one way to do so. CDs are one of the safest ways to save your cash, as most are FDIC or NCUA insured. This means that your deposits will be protected (up to $250,000 per account) even if your bank is faced with financial trouble or closes.
CD ladders
You can reduce the risks of a long-term commitment — and take advantage of long-term rates — by building a CD ladder. This is where you stagger, or ladder, maturities so that some are always coming due in the near future. When your first CD matures, you can either cash out or reinvest this cash into a new CD account to continue building your ladder.
For example, if you have $2,000 to put in CDs, consider putting $500 each in a three-month, six-month, one-year, and two-year certificate. When the three-month CD matures, roll it over into a six-month certificate. Do the same when the first six-month CD matures, and continue rolling over so that you'll always have a certificate within three months of maturity.
Bottom line
If you're looking for a fixed, predictable rate of return on your savings, a CD account can be a good option — especially when rates are still high. With some of the top earning 5-year CD rates today, you can earn over $75 in interest on a $500 deposit with no effort on your part.
If you think a CD account is the right fit for your savings goals, you'll want to lock in rates sooner rather than later. Savings rates have been on the decline since the Federal Reserve paused its interest rate-hiking campaign, and rates on savings accounts will fall even further when the Fed cuts interest rates later this year.
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