If you’re looking for a safe and profitable way to grow your savings, consider investing in a certificate of deposit (CD). CDs offer a fixed interest rate for a specific period, allowing you to earn more than traditional savings accounts. In this article, we’ll explore how CD investments work, the factors that affect your returns, and the best CD rates available.
Why should I consider CDs?
CDs come with several benefits that make them an attractive option for savers. Not only do they offer higher interest rates than regular savings accounts, but they also provide a safe investment with virtually no risk. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account holder, making them a secure choice for your money. Even if the bank goes out of business, you can rest assured that your funds will be protected.
3 elements of CDs that can affect returns
To maximize your CD returns, it’s important to consider three main factors that influence your earnings:
Interest rate
The interest rate is the primary determinant of your CD returns. Comparing CDs, savings accounts, and other investments using the annual percentage yield (APY) allows you to assess your potential earnings with different accounts. While banks may offer various compounding schedules and bonuses, APY provides a standardized measure of how much you can earn over a year.
Duration
The length of time you choose to save your money in a CD also affects your returns. Generally, the longer you hold a CD, the more you’ll earn. Banks often offer higher interest rates for longer-term CDs, so shopping around can help you find the best deal for your desired investment duration.
Early withdrawal penalties
Most CDs impose penalties if you withdraw your funds before the maturity date. These penalties can be costly, as they typically involve forfeiting a certain number of months of interest. If you haven’t held the CD for long, the penalty might even exceed the interest you’ve earned. Therefore, it’s essential to consider your financial needs and carefully plan your investment period.
How to calculate CD interest
Although calculating CD interest can seem complex, it’s actually quite straightforward. If you don’t have a calculator handy, you can use this formula:
Interest Earned = Initial Deposit (1+APY/Compounding Periods Per Year)(Compounding Periods Per Year x Number of Years) - Initial DepositHowever, to simplify the process, it’s recommended to utilize a CD interest calculator.
What are the best CD rates?
CD rates can vary and are influenced by the Federal Reserve’s target interest rate. As of the latest data, the average CD rates are as follows:
- One-month CD: 0.21%
- Three-month CD: 1.37%
- Six-month CD: 1.36%
- 12-month CD: 1.76%
- 24-month CD: 1.51%
- 36-month CD: 1.38%
- 48-month CD: 1.31%
- 60-month CD: 1.38%
However, it’s essential to stay updated on the latest rates as they can change at any time. By searching around the web, you may find CDs with higher APYs, such as 5.50% for 12-month CDs, 4.75% for 36-month CDs, and 4.65% for 60-month CDs. It’s worth shopping around to find the best rates and terms for your CD investment.
How much can you earn by investing in a $2,500 CD?
To provide you with an example, let’s consider how much you can earn by investing $2,500 in a CD at the current average interest rate. Please note that rates can change, so it’s always best to check with your bank for the most up-to-date information.
- Rates current as of Sept. 20, 2023. Rates can change at any time without notice. Check with the bank’s website for its most current rate.
How to have CDs and flexibility
While CDs typically have strict terms and withdrawal penalties, some options provide more flexibility. For instance, CIT Bank offers the 11-month No-Penalty CD, which allows you to withdraw your funds early without any penalties or fees. Although other previously available products, like the Ramp-Up CD, may offer increased interest rates, it’s important to check with the bank for their current offerings.
Alternatives to CDs as safe investments
If you’re looking for alternatives to CDs that offer safety and convenience, consider the following options:
High-yield savings account (HYSA)
A high-yield savings account (HYSA) offers above-average interest rates, often comparable to those of CDs. With an HYSA, you can earn substantial interest without being penalized for early withdrawals. However, keep in mind that the high interest rate is not guaranteed for a specific period and may change over time.
Money market account (MMA)
Money market accounts (MMAs) combine the benefits of a savings account with the convenience of a checking account. MMAs typically offer above-average interest rates, and some even allow check-writing abilities. Like HYSAs, MMA interest rates can change at any time.
Savings bonds
Savings bonds are a long-term investment option available directly from the United States government. Available through the TreasuryDirect website or as part of your tax refund, savings bonds can be purchased starting at $25. These bonds earn interest for up to 30 years, and certain types of bonds offer guarantees or inflation protection.
TIME Stamp: CDs are a safe and profitable investment if you don’t mind their illiquidity
CDs are a secure investment option that offers higher interest rates than regular savings accounts. Although CDs require you to commit your money for a specific period, they are an excellent choice when you don’t need immediate access to your funds and want to avoid losses.
Frequently asked questions (FAQs)
-
Can you get 5% on a CD?
Yes, some CDs offer 5% APY or higher for terms ranging from six months to two years. However, availability may vary. -
How much does a $10,000 CD make a year?
The earnings from a $10,000 CD depend on the interest rate and duration. You can use a CD calculator to determine your potential earnings based on different terms and rates. -
What is a good APY on a CD?
Good interest rates for CDs change over time. Researching the current best CD rates is essential when seeking a new CD account. -
Are CDs safe?
CDs are extremely safe because they are backed by the FDIC for up to $250,000 per depositor per institution. Joint CD accounts can receive up to $500,000 in government-backed insurance. -
Can you lose money with a CD?
The only way to lose money with a CD is by withdrawing it early, which may result in penalties. However, if you hold the CD until maturity, you won’t lose any money. -
What are the different types of CDs?
Most CDs have fixed terms and interest rates. However, some CDs have no penalties for early withdrawal, while others allow you to increase your interest rate when market rates rise.
For more personal finance tips and advice, visit Personal Finances Blog.