The holidays are a time for giving, for connecting with family and – if you’re lucky – for getting a bonus check from your boss in recognition of all the hard work you’ve done this year. While it could be tempting to take your bonus and treat yourself to whatever big ticket item you’ve had your eye on all year, there is another option you should consider – putting the money into a certificate of deposit (CD) and giving yourself an even bigger payday in the future.
Certificates of deposit are products offered by banks where you agree to store your money in the bank for a set period of time in exchange for earning interest – normally at a higher rate than other savings products. The only catch is that you can’t access the money during the term of the CD – taking money out early generally means paying substantial penalties. Since this is bonus money, though, it shouldn’t be a big deal to put it away for the future.
Already have a bonus sitting in your checking account? Open a CD today.
Why you should put your holiday bonus into a CD
There are a lot of things you could do with your bonus, from buying something you normally wouldn’t to investing it in the market. Here are a few of the reasons why putting that money in a certificate of deposit is a worthy option to consider.
Rates are high right now
The interest rates offered by banks for CDs are very high right now. This is due to repeated action by the Federal Reserve to raise the federal funds rate. While this doesn’t directly impact the rates banks offer for CDs, when the Fed raises rates, the interest rates offered for consumer savings products like CDs tend to go up as well.
If you act now, you could get rates of up to more than 5% for a 1-year CD and more than 4.5% for a 5-year CD. You should note that these high rates are most often available at online-only financial institutions. Traditional banks have overhead costs that their online counterparts don’t (think maintenance and rent for brick-and-mortar locations). Online banks don’t have the same costs and thus can typically offer higher rates to their customers.
Open a CD online now to start earning interest.
You’ll give yourself a bigger bonus down the line
Putting your holiday bonus into a CD is all about delayed gratification. Sure, you could take your bonus and spend it on something now – or you could wait and have even more money to work with down the line. Let’s use an example of a $10,000 bonus and see how much money you could have in the future if you put it into varying CD options.
First, a 1-year CD. There are many options for 1-year CDs that are at 5.5% and higher. If you put your $10,000 bonus into a 1-year CD with a 5.5% interest rate right now, you’d have $10,550 a year from now.
Next, let’s push ourselves a bit more and consider using a 3-year CD. For this term, you use an interest rate of 4.4%, which you can get at many banks currently. At that term and rate, you’d end up with $11,378.93 to spend when all is said and done.
Finally, if you can wait five whole years to cash out, you can consider a 5-year CD. The rate we’ll use for this example is 4.6%. If you put your $10,000 holiday bonus into a 5-year CD paying interest at 4.6%, when all is said and done you will have $12,521.56.
The money will be safe – and your interest rate consistent
One advantage CDs have over other options for your holiday bonus is that the money will be safe and your interest rate won’t change.
For instance, another choice you could make would be to put your money into the stock market. While this could end up paying off at a higher rate than a CD, there is also the possibility that your investments will go sideways and you lose money. This won’t happen with a CD, as they are insured by the FDIC for up to $250,000. Even if your bank fails, you won’t lose your principal.
High-yield savings accounts are also offering high interest rates right now – and you won’t be locking your money in like you do with a CD. The problem is that you wouldn’t be locking your rate in either. Since high-yield savings accounts are variable, if rates go down, your interest rate will go down as well. With a CD, you’ll earn the interest rate that was offered when you opened the account for the entire term of your CD.
The bottom line
Putting your holiday bonus into a CD is a smart choice if you want to earn some more money that can be used down the line. CD rates are high right now, so this is an especially good year to use this account type as a way to give yourself an even bigger bonus to play with in a few years.
