Putting money into a certificate of deposit (CD) account can help you earn a set amount of interest over a given period of time. By depositing money into a CD and letting it sit there until it matures, you can end up withdrawing more money than you initially put in.
How much exactly can you earn from a CD? It depends on the CD amount and terms. Here, we’ll explore some examples of how much money you can make from putting $5,000 into a CD, based on current CD rates.
Earning Average CD Interest Rates
The interest rates on CDs can vary significantly from one financial institution to another, so it can be valuable to compare your options among different banks, credit unions, and even brokerages if you want to look at somewhat more complex products like brokered CDs.
In terms of traditional bank CDs, however, the national average on a 12-month CD is 1.76%, according to the Federal Deposit Insurance Corporation (FDIC).
That means that in one year, a $5,000 CD earning the average of 1.76% annual interest would earn $88 before taxes. CD interest is generally taxed as ordinary income.
Note that if the CD compounds interest on more than an annual basis, you could earn more money, because you’re effectively earning interest on a higher balance as the interest gets added to your principal. Depending on the frequency of the compounding, such as daily or monthly, you could potentially earn a higher effective rate, known as the annual percentage yield (APY), if you let the CD grow untouched.
That said, on a $5,000 balance, compounding would probably only yield a few more dollars in interest per year, but it’s better than nothing.
Earning High CD Interest Rates
You don’t have to settle for average when it comes to CD interest rates. Many financial institutions make it easy to open CDs with much higher yields.
For example, you can now find many 12-month CDs with APYs of 5% or more. A $5,000 CD with a 5% APY would earn $250 in one year, before taxes. In other words, going with a high-yield CD in this scenario would result in earning $162 more pre-tax, compared to the average.
And you don’t have to limit yourself to 12-month terms. The longer your CD duration, the more you can potentially earn. Typically, long-term CDs pay more than short-term ones, although the inverse is generally happening in this current interest rate environment. Still, even if the annual interest rate on a long-term CD is lower, you can earn more interest overall by nature of letting the CD have more time to grow.
For example, you can find several 5-year CDs paying 4.5% APY or more. Even though 4.5% is less than 5%, with time and compounding interest, a $5,000 investment would yield $1,230.91 total, pre-tax, after five years.
See How Much You Can Earn
As you can see, the amounts you can earn on a $5,000 investment in a CD can vary significantly based on interest rates and time. Compare different options from different financial institutions, many of which offer online calculators that let you see specifically how much you can earn based on the CD amount, duration, and APY.
Keep in mind that CDs typically carry penalties for early withdrawals, however. So, while you can potentially earn more overall interest by choosing, say, a 5-year CD over a 1-year CD, if you have to withdraw the funds early, you could lose some of the interest you would have otherwise earned. That could make the longer-term CD not worth it.
Also, while it’s generally good to get a high CD rate, the variations might not always be worth it. An extra 0.10% in annual interest, for example, only yields an extra $5 per year for a $5,000 CD, before accounting for compounding or taxes. Thus, going with a bank that makes it complicated to get your money in and out, for instance, just to get a little extra yield, might not be worth it to you.
So, weigh your options in terms of how much interest you can potentially earn against factors like your comfort with that financial institution and the risk of keeping your money locked up for a given period. The flip side of that liquidity barrier, however, is that you might be less tempted to spend money held within a CD, given the penalties for early withdrawals.
Overall, CDs potentially help you earn some extra money while also helping you retain more of your savings. And by shopping around for high interest rates, you can earn even more money when putting $5,000 into a CD.
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