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.

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.

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.

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.

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.

CD Cons. Banks and credit unions can penalize savers who withdraw CD funds before maturity. CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs.

If the interest rate offered is below the current inflation rate, then investors in CDs will actually lose money on their investment when it's measured on an inflation-adjusted basis.

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.

Like savings and checking accounts, most CDs are protected by deposit insurance, meaning your funds are insured by the Federal Deposit Insurance Corp. (FDIC) at a bank and the National Credit Union Administration (NCUA) at a credit union.

Is it smart to put your money in a CD? ›

CDs are good for medium-term savings goals. The best CD rates tend to be at online-focused institutions. High-yield CDs in recent years have reached 4% to 5% annual percentage yields, which might be enough to keep better pace with inflation than regular savings accounts can.

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.

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.

A five-year CD is a low-risk investment with predictable returns and a significantly higher yield than traditional savings. When interest rates are high, a five-year CD allows you to lock in an attractive rate for a relatively long 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.