Are CDs worth it? How much money should you put in a CD?

Compare your financial goals against how much you can afford to keep locked away

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When you deposit money into a certificate of deposit (CD), you agree to leave it in the account for a specific period of time, known as the term. In exchange for keeping your money in the account for the term, the bank agrees to pay you a higher interest rate than you would receive with a traditional savings account.

The interest rate on a CD is usually fixed, which means it will not change during the term of the CD. (However, there are some variable-rate CDs out there, so keep that in mind when you’re shopping for a CD.)

The interest earned from CDs is considered taxable income and is reported on your tax return, unless you have the CD in a tax-advantaged account such as an IRA.


Key insights:

  • CDs are illiquid investments offered by banks that return more than the average savings account.
  • Many banks carry deposit minimums and maximums for CD investments, which may limit your options.
  • If you have an emergency fund in place and are sure you will not need the invested money in the immediate future, CDs are a safe alternative to traditional savings accounts.

How much money do you need to reach your goals?

People often open CDs to save for a specific medium- or long-term goal, such as buying a home or paying for college. The amount you’ll need to reach your specific goal depends on a number of factors:

  • The cost of the goal: Determine how much your goal will cost in total, including any associated expenses.
  • Time frame: Consider how long you have to save for the goal and how much you will need to save each month to reach your goal on time.
  • Your current savings: Consider how much you have saved already and how much you can realistically save each month.
  • Other financial obligations: Make sure you have enough money set aside for other important expenses, such as rent, bills and emergencies.

Let’s look at a real-world example. Say you invested $1,000 into a 12-month CD with a 4.4% interest rate, compounding monthly. At the end of the year, your money would be worth $1,044. 

If you deposited a bit more — say $5,000 — you’d have $5,224 by the end of the term.

» MORE: Interest rates and how they work

How much can you afford to put into a CD?

The amount you can afford to put into a CD will depend on your personal financial situation. It’s important to consider your other financial obligations, such as rent or mortgage payments, car loans and credit card debt, as well as your savings goals and emergency fund needs.

It is generally recommended to have an emergency fund of three to six months of living expenses before investing in a CD. Ensuring that you have an emergency fund is important because you may be subject to a penalty if you withdraw the CD funds before the end of the CD term.

It's also important to consider your risk tolerance. CDs are considered low-risk investments, but they typically have lower returns than other types of investments, such as stocks. If you are hoping to see a more rapid rate of capital growth, CDs may not be a suitable investment for you. Weigh the possibility of lower returns against the security that CDs offer when making your investment decision.

» MORE: What is a good investment?

What’s the minimum deposit for a CD?

CDs typically have a minimum deposit of between $500 and $1,000. However, some institutions can charge substantially more, while some waive minimum deposits. This minimum deposit requirement is similar to some savings accounts offered by banks but is different from other investment alternatives, such as buying stocks and corporate bonds.

If you are working with a relatively small sum (less than $400), CDs may be out of reach for you.

What’s the maximum deposit for a CD?

The maximum deposit for a CD depends on the bank where it is purchased. Some banks have no maximum deposit, while others may have a limit of $250,000 or more.

Jumbo CDs are certificates of deposit that have a minimum deposit of $100,000. They typically offer higher interest rates than regular CDs, but given the extremely high initial deposit, accessing the account early could result in an unforgiving penalty. Review all the terms and conditions of a CD before making any deposit.

Laddering is an investment strategy in which money is invested in multiple CDs with different maturity dates. Laddered CDs may be a better option for those with large deposits — rather than investing a lump sum into one CD, you can spread it out over different term lengths and interest rates.

Consider inflation

At the time of publishing, when inflation is above 6% and the average 12-month CD is returning less, putting money into a CD may not be your best option. If you are hoping to see a return that outpaces inflation, CDs are not the place for you — at least, not right now.

When you should open a CD

You should open a CD when you want to save money for a medium-length to long period of time — typically more than one year — and can commit to not accessing those funds for the duration of the CD term.

CDs typically offer a fixed rate of return, meaning the amount of interest you will earn is known ahead of time. This makes CDs an ideal option for low-risk investors looking to steadily grow their savings.

However, if you know that you will need the money soon, opening a CD likely doesn’t make sense for you. In this situation, putting the money into a high-yield savings account may be a better option.

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FAQ

What is a good percentage on a CD?

The national average for a 12-month CD is between 1.3% and 1.4% at the time of publishing, according to the Federal Deposit Insurance Corporation (FDIC), though many online banks offer rates significantly higher.

When do CDs pay out?

The bank will pay you interest on the funds in your CD, and the interest is usually paid at regular intervals, such as monthly or quarterly. The full balance will pay out at the end of the chosen term.

Can you add money to a CD?

Depending on the type of CD, you may be able to add money. However, terms and conditions vary by CD.

Can CDs lose value?

As long as you do not withdraw funds before the end of the term, your CD will not lose value. The interest rate is fixed on most CDs, so you earn a predetermined rate or return.

Are CDs a good investment?

For investors looking for an investment that is insured by the FDIC and will return a rate higher than most savings accounts, a CD can be a good investment. However, if you are looking for more aggressive capital growth, a CD may not be the right choice.

Bottom line

If you are hoping to double your money in less than a decade, a CD isn’t for you. But if you are simply hoping to earn more money than a savings account while maintaining a similar level of security, a CD could be a good option.

Determining how much money you need on hand and how much time you can leave the funds untouched will help you determine whether a CD is the right investment for you.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. U.S. Bureau of Labor Statistics, “ Consumer Price Index .” Accessed Feb. 27, 2023.
  2. Federal Deposit Insurance Corporation, “ National Rates and Rate Caps .” Accessed Feb. 27, 2023.
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