3 reasons I moved more than half of my cash into a 12-month CD with a 5% APY (2024)

FAQs

Which of the following are reasons for putting money into a CD? ›

A CD is one of the safest savings vehicles you can choose. Unlike the stock market or a variable-rate savings account, the interest rate on a CD is fixed and guaranteed, so you can grow your savings risk-free. Like other deposit accounts, each CD account is insured by the FDIC (as long as your bank is an FDIC member).

While CDs can provide some guaranteed returns over time and some level of security, they're not likely to provide you the returns needed to build wealth for retirement over time. Instead, it might make more sense to build wealth with other assets and only use CDs for a portion of your portfolio.

Disadvantages of investing in CDs

The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD. If you open a 12-month CD and need to withdraw the money before it reaches the maturity date, you might lose three months' worth of interest that you earned.

One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.

If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate you agreed to when you opened the account. And if you take your money out before a CD matures, you'll pay a penalty -- typically three months of interest.

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.

Know a CD's federally insured maximum

Federal deposit insurance protects your money up to $250,000 if a bank collapses. A bank may allow you to deposit more than that limit if you're fortunate to have that much.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.

For example, if you deposit $500 in a five-year CD that earns a 5.15% APY, your balance by the end of five years will be $642.71, earning you $142.71 in interest. However, if the interest rate is 3.25%, your earnings will only be $586.71, a difference of $56 in interest earnings.

Are 1 month CDs worth it? ›

Getting a one-month CD can be a smart way to earn interest on cash you don't need access to without a long-term commitment. If you have more time to save, consider long-term CDs instead, which typically offer much higher interest rates.

The FDIC Covers CDs in the Event of Bank Failure

CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency. If you have multiple CDs across different member banks, each will be protected up to that limit.

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

It's possible, but it isn't realistic for everyone. Living off of interest relies on having a large enough balance invested that your regular interest earnings meet your salary needs. Rest assured that you don't need to earn a million dollar paycheck to reach your goal.

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.

A CD allows you to hold money for a specific amount of time while earning interest. A CD can be used as a savings vehicle, but it isn't the same as a savings account or money market account. For instance, with those accounts, you can generally make up to six withdrawals per month if needed.

Why? Because putting your money in an FDIC-insured bank account can offer you financial safety, easy access to your funds, savings from check-cashing fees, and overall financial peace of mind.

Higher APY than other types of savings accounts

If you open a CD when the federal funds rate—or the Fed's benchmark rate—is low, you won't rake in as much interest as you would if interest rates were higher. Another factor you'll want to pay close attention to is your investment time frame.

CDs can be a safe, secure way to set aside money for your financial goals. A CD may offer a higher interest rate and APY than a high-yield savings account or money market account. Returns are virtually guaranteed and you can easily estimate how much your money will grow.