Here’s how much investing $10,000 in a CD right now will earn you

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 Certificates of deposit (CDs) are a popular investment choice for many, and for good reason. They offer a predictable return, FDIC or NCUA insurance, and a range of terms for different financial goals. Whether saving for a short-term expense or planning for retirement, investing in a CD can be a smart move. 

The average rate for most CDs is between 1.50%-1.80% APY, according to the FDIC. But you can often do much better than that — the top CDs on the market, for example, offer over 5.00% APY. Here’s how much your money could grow.

Best CD rates 

As of May 2024, the best interest rates for CDs are as follows: 

• 6-month CD: up to 5.30% APY 
• 1-year CD: up to 5.30% APY
• 3-year CD: up to 4.60% APY 
• 5-year CD: up to 4.80% APY 

Remember that how much interest you can earn in a CD depends on the term and the financial institution.

How much $10,000 could grow in a CD 

Here’s how much interest you could earn with a $10,000 initial deposit at the top rates.

These calculations assume interest is compounded annually and you don’t withdraw the funds before the CD matures. 

Some banks offer different compounding frequencies, which can slightly affect your total earnings. 

What if I have less? 

If you can't or don't want to lock up $10,000 for a long period of time, here’s a breakdown of how much you could earn with a smaller deposit. Remember that some CDs have a minimum initial deposit requirement to open an account.

How do CD rates work? 

 The Federal Reserve sets the federal funds rate, which is the interest rate at which banks lend money to one another overnight. This rate is a benchmark for many other interest rates, including CD rates. When the Federal Reserve raises or lowers the federal funds rate, CD rates often follow suit. 

Banks and credit unions also compete for customers' deposits by offering higher interest rates on their CDs. If a bank needs to attract more deposits to fund its lending activities, it may offer higher CD rates. 

Generally, longer CD terms offer higher interest rates compared to shorter terms. This is because banks can count on having your money invested for longer, allowing them to lend out those funds and generate more income. 

Why short-term CDs are offering higher rates right now 

But right now, shorter-term CDs are offering higher rates than longer-term CDs. This occurs when banks believe that interest rates will decline in the future. The Federal Reserve has paused raising interest rates and is expected to lower rates this year. 

As a result, banks offer higher rates on shorter-term CDs to attract savers looking to capitalize on the current high rates while maintaining flexibility.

Why invest in a CD? When it comes to investing your hard-earned money, safety and security are top priorities. This is where CDs shine. Here are the key benefits of investing in a CD.

Safety and security

Banks and credit unions, which are heavily regulated financial institutions, issue CDs. When you invest in a CD, your money is protected by federal insurance through the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. 

The FDIC and NCUA provide insurance coverage for up to $250,000 per person, per account. This means that even if the bank or credit union fails, your investment is protected up to the insured limit.

Guaranteed returns

When you open a CD, you agree to leave your money invested for the term. In exchange, the financial institution offers a fixed interest rate for the entire term, ranging from a few months to several years. 

The most common terms are 1-year, 3-year, and 5-year terms. This fixed interest rate provides a predictable return on your investment. Regardless of market conditions, you can count on receiving the exact return. 

This predictability is valuable for savers with a specific money goal. While the returns may not be as high as other investments — like stocks — the peace of mind with a guaranteed return is often worth the trade-off.

Competitive interest rates

CDs generally offer higher interest rates compared to traditional savings accounts. Banks and credit unions are willing to pay higher rates on CDs because they can count on having your money invested for a set period. 

This allows them to lend those funds to other customers and generate income. By shopping around and comparing rates, you can find CD rates that help you maximize your earnings. 

How to find the best CD for you: 3 questions to ask

 As you compare different CDs, consider these key questions to find the best option for your money.

What is the term?

When choosing a CD term, consider your short-term and long-term financial goals. If you have a specific purchase for which you'll need the funds within a year or two, a shorter CD may be better. But, if you're saving for a long-term goal like retirement, a longer-term CD can help you maximize your earnings over time.

What’s the early withdrawal penalty?

CDs are designed to be held until maturity, and withdrawing your funds before the end of the term can result in a penalty. 

Early withdrawal penalties vary depending on the financial institution and the term. Typically, the penalty is calculated as a percentage of the interest earned or a certain number of months' worth of interest. CDs with terms of less than a year typically have a penalty of 90 days’ worth of interest. Longer-term CDs tend to have steeper penalties, like up to 365 days' interest. 

Also, some banks and credit unions will not allow partial withdrawals. Read the fine print to understand the penalties if you need the money earlier than expected.

Can you use CD laddering?

CD laddering involves dividing your investment across multiple CDs with different maturity dates. 

For example, instead of investing $10,000 in a single 5-year CD, you could divide the investment into five $2,000 CDs with terms of 1, 2, 3, 4, and 5 years. As each CD matures, you can either reinvest the funds into a new 5-year CD or use the money for other purposes. 

The benefits of CD laddering are twofold. First, it allows you to take advantage of higher interest rates on longer-term CDs while still maintaining some liquidity. 

Second, it mitigates the risk of locking your entire investment at a low interest rate. If rates rise in the future, you'll have the opportunity to reinvest some of your money at the higher rates, says Elliot Pepper, certified financial planner at Northbrook Financial. 

“While inflation, and the government's battle against it, are strong contributors to the higher yields on CDs, investors should be mindful of the ongoing inflation risk that accompanies locking into a fixed return investment option,” Pepper says. “Using multiple smaller CDs with varying maturity dates can provide some liquidity and interest rate variation.” 

Bottom line 

The Federal Reserve has paused its rate hikes, and CDs still offer competitive rates for your money. If you’ve been thinking about moving some of your savings into a CD, now is the time to lock in a solid rate before they drop in the future. 

But make sure you have enough money readily accessible in an emergency fund. CDs aren't the best place to put your emergency money because they are more illiquid. Consider instead a high-yield savings account — which offers competitive rates but more flexibility.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.