Certificates of deposit (CDs) have become popular places for investors to put some of their cash lately, thanks to their generous annual percentage yields (APYs). CDs are currently paying yields of 5.00% or higher.
If you’ve got a large sum of money, like $10,000, a CD is a safe place to let it grow. Here’s how much your money could earn, and a few things to know before you open a CD.
How much you can make with $10,000 in a CD
How much you earn from your CD depends on the amount you deposit, the CD’s APY, and the term length. Let’s assume you have $10,000 to invest and are considering a few CD options with different CD rates and term lengths.
Here’s how much you can make with $10,000 in a CD with a 5.00% APY:
- $500 in interest in one year
- $1,025 in interest in two years
- $2,762 in interest in five years
If, on the other hand, you invest $10,000 in a CD with a 4.00% APY, you’ll earn:
- $400 in interest in one year
- $816 in interest in two years
- $2,166 in interest in five years
These are impressive earnings, considering you don’t have to do anything to get this return besides opening an account and leaving your money in it.
What happens if you withdraw some money early?
CD rates are generally guaranteed. But if you withdraw money from the CD before the term length is up, you’ll be charged a fee, which will lower the overall percentage you earn from your CD.
For example, let’s assume you put $10,000 into a 2-year CD paying 5.00%. But after one year, you have a financial emergency and take your money out. In this scenario, you’d have to pay a penalty fee of about $122, and your effective CD rate would drop to 3.78%.
Keep your money in the account for the full term to avoid penalty fees and earn the full CD rate.
Banks can charge different fees, but most will charge 90 days of simple interest on the amount withdrawn for CDs of two years or less. For CDs longer than two years, you’ll typically be charged 180 days of simple interest.
Tip: No-penalty CDs are available, but they usually pay a lower rate than traditional CDs.
When CDs make sense
CDs are a great investment if you can get a high APY and you’re looking for a stable place to put your money.
With a (nearly) guaranteed APY, CDs can be an excellent place to earn interest that outpaces inflation. For example, a CD could be a good option if you’re near retirement and want a safe place to let your cash grow and don’t mind it being locked away.
Just don’t put any money into a CD you might need for an emergency. If you want a high-yield account that still gives you easy access to your cash, choose a high-yield savings account instead. Savings account APYs are not locked in, unlike with a CD — they are variable. But in exchange, you can withdraw your money anytime without fees.
But if you don’t mind having your money tied up for the CD term length, and want a guaranteed rate (as long as you don’t withdraw money early), opening a CD may make a lot of sense.
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