Certificate of deposit (CD) rates have risen over the past few years, making them an attractive option for people looking to grow their money. But figuring out how much to put into a CD and when it's the right time can be challenging. Here are a few things to keep in mind before you jump in.
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How much should you put into a CD?
The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time.
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.
Once you have enough money saved for a minimum amount, the next step is to look at the current amount of cash in your bank account and your total investments to determine how much should go into a CD. For example, U.S. Bank says a general rule of thumb is for cash and cash equivalents (including CDs) to make up 2% to 10% of your portfolio.
Let's assume you have a total of $50,000 of investments and cash. In this scenario, you may want to put $2,500 -- 5% of your $50,000 -- into a CD. Keep in mind that you don't want to put all your cash into a CD.
What money should go into a CD?
A CD is a safe place to store some of your money so it can earn you more money. But it works differently than a high-yield savings account.
With a savings account, you can generally take out the money when you want to, without a penalty. Savings accounts give you more flexibility but typically earn a lower rate of return. But when you put your money in a CD, you're agreeing not to touch the cash for a set amount of time -- sometimes for up to 5 years -- while you earn a predetermined rate on the money you put into it.
In exchange for handing your money over for that time, you receive a higher interest rate.
What money shouldn't go into a CD?
A CD isn't the place to build an emergency fund, and it's not for retirement investing. Most financial experts recommend having at least $1,000 in an easily accessible emergency savings account. Ideally, you want to eventually build that amount up to three to six months' worth of your living expenses.
A CD isn't the place to keep this money because you won't be able to easily access it during an emergency. CDs often charge fees for withdrawing money, while savings accounts generally do not. If you need cash to fix your car or replace a broken appliance, you want easy access to your money and no penalties for withdrawing it.
Plus, a CD isn't the place for you to put your retirement money. A CD generally won't earn enough to build a retirement nest egg, so it's best to put that money into a brokerage account where you can buy stocks and index funds.
Dip your toe in first
Like any major financial decision, it's best to move slowly. It may be a good idea to put a small amount of money into a six-month CD to learn how it works, how you earn interest, and how you feel about having your cash temporarily committed to a CD.
And if you don't like having some of your money in CDs by the end of six months, at least you'll have earned some interest and learned something new along the way.
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FAQs
For example, U.S. Bank says a general rule of thumb is for cash and cash equivalents (including CDs) to make up 2% to 10% of your portfolio. Let's assume you have a total of $50,000 of investments and cash. In this scenario, you may want to put $2,500 -- 5% of your $50,000 -- into a CD.
How much should you put down on a CD? ›
You must typically make a minimum opening deposit, usually between $500 and $2,500, although some accounts don't have this requirement. Your financial circ*mstances and a few other key considerations can help you determine how much to keep in CDs and take advantage of today's high interest rates.
Should I put $50,000 in a CD? ›
You might be reluctant to put your money in high-risk investments, like stocks. However, for potentially higher returns over a longer period, a certificate of deposit (CD) could be a great place to put your $50,000.
What is the biggest negative of putting your money in a CD? ›
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.
Is it worth putting money in a CD? ›
Is it worth putting money into a CD? For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.
What is a good amount of money to put in a CD? ›
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.
How much is too much to put in a CD? ›
While you must meet the minimum deposit to open a CD account and earn interest, you can always exceed the minimum deposit. Remember that any deposits or interest earnings above $250,000 (per insured institution, per account ownership category) won't be federally insured.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 6 months | 2.49% | $125.15 |
| 1 year | 2.60% | $263.12 |
| 18 months | 2.21% | $336.74 |
| 2 years | 2.08% | $424.40 |
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If your goals have different timelines, multiple CDs with different maturity terms could help you create an effective savings strategy. This allows flexibility in saving money for short- and long-term goals.
Do you pay taxes on CDs? ›
Key takeaways
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.
Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.
Are money CDs safe if the market crashes? ›
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
What is the catch with putting your money in a CD? ›
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.
Should I lock in a CD now or wait? ›
CD rates are at a 3-year high—but waiting longer to buy could be a gamble. CD rates have risen steadily over the past 12 months alongside the Fed's rate increases. Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed's rate hikes.
What bank is paying 5% on CDs? ›
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| Able Bank | 5.15% | 12 months |
| Newtek Bank | 5.15% | 12 months |
| Sallie Mae | 5.15% | 12 months |
| Citibank | 5.13% | 3 months |
31 more rowsRamsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.
How much will a $25,000 CD make in a year? ›
1-year CD rates
If you deposited $25,000 into a 1-year CD with the current highest interest rate of 5.37%, you would earn $1,342.50 in interest.
What is a good CD rate to invest in? ›
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| Popular Direct | 5.30% | 3 months |
| First Internet Bank | 5.26% | 12 months |
| Bread Savings | 5.25% | 12 months |
| Forbright Bank | 5.25% | 12 months |
31 more rowsEarnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 6 months | 2.49% | $125.15 |
| 1 year | 2.60% | $263.12 |
| 18 months | 2.21% | $336.74 |
| 2 years | 2.08% | $424.40 |
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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.
