Certificates of deposit, otherwise known as CDs, offer a predictable way to grow your savings, since they deliver the same interest rate over the entire term.
They tend to have higher interest rates than savings accounts, which can make them an even more attractive option. And, as long as they’re at a federally insured bank or credit union, your money is safe — FDIC and NCUA insurance provide up to $250,000 insurance.
Exactly how much money your deposit can earn depends on the APY and the term you select. Traditionally, longer term CDs have had the highest APYs, though right now 1-year CDs generally have higher rates.
But there are still reasons to consider a longer-term CD. An extended term lets you lock in a rate across many years and provides more protection against downswings in the market. Right now, 5-year CDs at the best banks are offering rates above 4.00% — while that’s not as high as many 1-year CD rates, it’s still excellent, and you know you’ll earn it for five times as long.
CD rates might be peaking soon, so for some people it makes sense to lock in a still-decent rate for longer. Rates have skyrocketed in the past year alongside the federal funds rate, which the Federal Reserve has raised 11 times since March 2022. At its most recent meeting in September, the Fed indicated that one more hike is likely this year, followed by two cuts at some point in 2024. While CD rates won’t immediately plummet, they probably at least start to decline in 2024.
To help you think about your options and seize on today’s especially high rates, we’re going to walk through a few different scenarios so you can see how much interest you’ll earn if you put $500 in a CD for 5 years.
- 4.50% APY
- $0 minimum deposit
- Early withdrawal penalty: 180 days of interest
How much will you earn if you put $500 in a 5-year CD at BMO Alto?
This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.
- 4.30% APY
- $500 minimum deposit
- Early withdrawal penalty: 2 years of interest
How much will you earn if you put $500 in a 5-year CD at Quontic Bank?
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
- 4.00% APY
- $0 minimum deposit
- Early withdrawal penalty: 365 days of interest
How much will you earn if you put $500 in a 5-year CD at Synchrony Bank?
This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.
As you can see, at least in these examples, the difference between your earnings among the different accounts is minimal. If all else is equal, you’d probably pick the CD with the highest APY of the three. But there may be some nuances to your situation that make you choose one CD over another.
If you think there’s a chance you may need your money before the CD matures (that is, the term ends), then you may opt for a CD with a lower early withdrawal penalty. If you already do all of your other banking at one financial institution, you may choose a CD there for convenience, even if it doesn’t offer the highest APY.
You may have different needs altogether, however, and a CD with a different term might serve you better. In that case, it’s worth shopping around online to find an option that’s right for your situation. If you’d prefer a 1-year CD, for instance, you can find APYs of 5.00% or higher.
Alternatives to 5-year CDs
If you’re not comfortable locking your money away for five years but still want a secure investment, you can earn an excellent return right now in several different ways.
We mentioned 1-year CDs above, but you can find CDs with even shorter terms than that. For the quickest return, consider a 3-month CD. Several options deliver 4.00% APY or higher right now. You can also find APYs upwards of 5.00% on 6-month CDs, if you’re looking for an in-between option.
One potential downside of short-term CDs is that you don’t have as much time for interest to compound, which is the interest you earn on already accrued interest. If it ends up you don’t need your money when a short-term CD matures, you can always renew it at the current rate — and then continue earning interest on the new principal.
High-yield savings accounts
Interest rates on the best savings accounts are the highest they’ve been in about 15 years, making them another excellent place to stash your money right now. The average APY as of September 21 was 0.58%, according to Bankrate’s weekly survey. If you’re willing to consider online banks, though, you can do much better than that. The best online banks offer APYs of 5.00% or more.
If you deposit $500 in a high-yield savings account with a 5.00% APY, you could earn as much as $142 over five years — assuming you don’t make anymore deposits and that the APY stays the same. Interest rates on savings accounts are variable, however, so they can go down as easily as they go up.
A high-yield savings account gives you flexibility since you can deposit and withdraw money whenever you want without facing a penalty (though you may have to pay a nominal fee if you make more than six withdrawals in a month). That flexibility makes them a great place for your emergency fund as well for money you’re saving toward a shorter-term goal, like a vacation or a down payment on a new car.
Money market deposit accounts
Rates on money market deposit accounts are at 20-year highs right now — topping 5.00% — which makes them another great option for safely growing your money. (Note that money market deposit accounts and money market funds are two different things — accounts are FDIC insured, but funds are not, since they’re an investment vehicle.)
Money market accounts blend the higher interest rates of savings accounts with the check-writing privileges of a checking account. That can make them a best-of-both worlds option for people who need regular access to their money.
A 5-year CD can be an excellent way to grow your savings, especially if you want to hedge against changes in interest rates. No matter what happens in the broader economy, the rate you lock in today will be the same five years from now when the CD matures.
However, if you want greater access to your money, consider a high-yield savings account, money market account, or shorter-term CD. Rates on those products are also fantastic right now.
So, if you take away nothing else from this article, focus on this: With interest rates higher than they’ve been in years, it’s the perfect time to shop around for an account — any account — that will make your money work harder for you.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].