Did You Know How Lucrative Buying CDs Can Be?

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With some banks offering CD rates of over 5%, CDs can be extremely profitable. Find out how much you’d make with different amounts over different terms. [[{“value”:”

Saving money can be like doing an uphill obstacle course. Not only do you need to squeeze cash from your budget so that you can save it, but you also need to figure out which account makes the most sense. With top CD rates at more than 5% right now, they can certainly be a lucrative option. The question is, how profitable are they really?

What makes a CD lucrative?

CDs come in different flavors. For the most part, when you put money into a CD you commit to leaving it alone for the full CD term. Otherwise, you will have to pay an early withdrawal penalty which can eat into your gains.

Assuming you don’t withdraw your funds early, the following factors will influence how much money you might make from a CD:

The amount you investThe length of the CD (also known as the CD term)The CD’s APYWhether you reinvest your interest along the way

One great thing about a CD is that the APY is locked in for the whole time. So, unlike, say a high-yield savings account, you know exactly what you’ll get. If you open a 3-year CD today with an APY of 4.00%, that’s the rate you will get for the whole three years. If you put $5,000 into that CD and reinvested your gains, it would earn almost $625 in total.

Here’s how lucrative buying CDs can be

The current high interest rate environment has turned CD logic on its head. It used to be that you’d get a higher rate if you were willing to lock your money away for a longer period. But right now, banks think the Federal Reserve will cut rates in the near-ish future. That means you can get higher APYs on shorter terms because banks don’t want to commit to paying today’s high rates for longer periods.

If you put $1,000 into a CD

As with many financial products, it is important to shop around to find the best deal for your situation. Some banks might pay extremely competitive rates on short-term CDs, while others may stand out for their longer-term options. Others might have minimum deposit requirements that don’t fit with your finances.

Here’s how much you might make if you put $1,000 into various CD terms available today:

If you put $5,000 into a CD

Some top CDs have higher minimum deposit requirements. As such, if you’re able to invest $5,000 you may be able to unlock better rates. Here’s how much you might make if you put $5,000 into various CD terms today:

If you put $10,000 into a CD

If you’ve got $10,000 in savings, congratulations. It’s a significant amount. Before we jump into what you might gain by putting that money into CDs, it is worth thinking about whether CDs are the best place for that kind of money.

CDs are savings vehicles rather than investments. That makes them safer than, say, investing in the stock market. But you might be able to get better returns through an investment account. This is especially true if you have an emergency fund and you know you won’t want to touch that money for the coming five to 10 years.

That said, there are many scenarios where lower-risk saving strategies make sense. Here’s how much interest $10,000 in CDs could generate.

CD laddering

If you have $5,000 or $10,000 to put into a CD, it is worth looking into CD laddering. This involves splitting your money into different CD terms — perhaps you’d break it into 1-year, 2-year, 3-year, 4-year, and 5-year CDs. The advantage here is more flexibility. Rather than locking up a lump sum for a long period of time, you’d be able to access your money when each individual CD matures.

It is a bit harder to predict how profitable this would be because we don’t know what rates will be available when each CD matures. There’s certainly an argument for locking in today’s high rates on the basis that they won’t last forever. Conversely, if flexibility is more important than getting the highest APYs, a CD ladder could make sense.

Bottom line

Depending on how much you can put in a CD, today’s high rates can make them an extremely lucrative option. When you’re running the numbers, bear in mind that these APYs are unusual. At some point, the Fed will cut rates, and savings rates will fall. There’s a lot to be said for locking them in while they last.

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