A certificate of deposit (CD) is a safe and secure way to earn interest on the money that might otherwise sit in a checking account. Not only does a CD offer guaranteed returns because your interest rate will be locked in when you open the account, but your principal is completely safe, as in most cases, the FDIC or NCUA insures CDs at up to $250,000.
If you have $20,000 that you won’t need access to for a while, putting it into a 5-year CD right now could be the right move for you.
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Here’s how much you could make if you put $20,000 into a 5-year CD right now
A CD is an interest-bearing account offered by banks that offers a guaranteed rate of interest in return for keeping your money in the account for the full CD term. There are generally stiff penalties for withdrawing your money early, but if you can avoid an early withdrawal, it can be a smart move to make right now — and could result in lucrative returns on your money.
The key to determining how much interest you’d earn with a CD is to know the interest rate. Right now, interest rates are higher than they’ve been in years due to the Federal Reserve raising its federal funds rate over the last 18 months to fight inflation. Right now, it’s possible to find interest rates of up to 4.60% on 5-year CDs.
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How much interest would you earn?
If you put $20,000 into a 5-year CD with an interest rate of 4.60%, you’d end the 5-year CD term with $5,043.12 in interest, for a total balance of $20,5043.12.
Not all CDs offer that interest rate, though. For example, if you open a 5-year CD with an APY of 4.50%, you would earn $4,923.64 in interest, for a total account balance of $24,923.64.
With a 4.45% interest rate, your interest would be $4,864.07, and your total account balance would be $24,864.07 at the end of the 5-year term.
And, while it’s important to shop around to find the best rate, you should also consider factors like the quality of the bank and the minimum account size.
It’s worth noting that rates for high-yield savings accounts are also high right now, but they could decrease if the Fed lowers the federal funds rate. Unlike CDs, the rate on your savings account is variable, meaning that when rates go down you earn less in interest.
The bottom line
Putting $20,000 into a 5-year CD right now could be a smart move. With interest rates as high as they are, you could earn thousands of dollars in interest by the end of the term with essentially no risk to your principal. Just make sure you’re comfortable locking your money away for the full five years so you don’t have to pay penalties for early withdrawal.
