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Competitive CD rates are over 5% right now, making them a good investment. Take a look at what that means in real money. [[{“value”:”
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I like percentages as much as the next person (honestly, probably more), but when someone just throws them at me without any real-world examples to add context…not so much. So when everyone talks about how great certificate of deposit (CD) rates are right now, I don’t want them to just give me rates. I want to know what those rates mean in real numbers.
For instance, suppose I have $10,000 to park somewhere for a year. How much would I really earn if I put it in a CD? Let’s see what the math says.
You could earn more than $500 in interest
The exact rate of the CD will dictate how much interest you earn. The higher the rate, the more money you’ll earn.
The best 12-month CDs are currently earning around 5%, so we’ll look at a range of rates. (I’m assuming interest compounds monthly, as is typical.)
Overall, you’re looking at around $500 in income for just letting your $10,000 sit in a CD for a year. This is basically the definition of passive income, since you don’t have to do squat once you set up the CD.
The rate is the key factor
The table above also shows you exactly how much your rate impacts your earnings. With a $10,000 deposit, even a single percentage point can make a $100 difference in how much interest you earn.
It’s vital to pay close attention to the rate when you open a CD. The top-tier rates aren’t as common as you may think. Indeed, the national average rate for a 1-year CD is a measly 1.81%.
Here’s what a rate at or around the average will earn.
So, if you have a CD with a rate at the average, you’re going to earn at least 60% less than if you invest in a CD with a competitive rate.
How to find high-yield CDs
There are a lot of ways to find CDs with great rates. You can start by exploring our reviews and recommendations:
Best 6-Month CD RatesBest 12-Month CD RatesBest 18-Month CD Rates
You can also check out your favorite online banks. Online-only banks often have better rates than most brick-and-mortar banks. Your smaller regional banks and local credit unions can also be great places to find good rates on CDs (and other products).
No matter where you get your CD, make sure you leave your money alone once it’s invested. Your high-earning CD will be a lot less lucrative if you’re forking over half (or more) of your interest in penalties.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Brittney Myers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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