How much should you deposit into a long-term CD?
While inflation and elevated interest rates have made borrowing more expensive for millions of Americans, they've also substantially increased the benefits of deposit vehicles like high-yield savings and certificates of deposit (CD) accounts. The specific benefits of both account types are in the details. However, specifically the rate of interest that can be obtained. And, for CDs, an additional component is added to the mix — the length of the CD term.
CDs don't operate like high-yield savings accounts. The rate that can be secured will expire once the CD term, or length, has concluded. Rates on both short-term (under 12 months) and long-term CDs (longer than 12 months) are elevated now, leading many to wonder how much they should deposit into an account. This consideration is especially important for long-term CDs, as savers won't be able to access their funds early without paying a penalty to get to them.
Start by exploring your CD account options here to see how much you could be making.
How much should you deposit into a long-term CD?
The amount of money you should deposit into a long-term CD varies based on a series of personal factors. Here are three considerations to account for that can help you narrow down an exact figure.
Your long-term goals
What exactly are you trying to accomplish with a long-term CD? Are you looking to make as much money as possible, or are you just looking for a safe way to protect and grow your money over the next few years?
If you're looking for the former, then it makes sense to deposit more money (the more you deposit, the more interest you'll make and the more that can potentially compound over time). But if you're looking for a way to safeguard your money from an endless cycle of deposits, withdrawals and impulse purchases, then a smaller amount that can sit there undisturbed may be better.
Check your CD account options here and start earning more interest.
Your budget
To truly benefit from a CD, you'll need to leave your funds in an account untouched for the full CD term. If you withdraw it early, you could wind up getting penalized for some or all of the interest you've earned to date. So understand your budget to better determine how much you should deposit into a long-term CD.
In theory, you'll want to deposit enough to develop a "set it and forget it" mentality, but not so much that your current financial situation will suffer. Know what you can part with now, and for the foreseeable future, and limit your long-term CD deposit to that maximum.
The current interest rate environment
The current rate environment is high, but there's no telling if it will go higher or how long it will remain this elevated. That's why a long-term CD makes sense now. Even if rates drop in the next year or two, you'll still be able to earn the higher rate you opened the account with.
But, on the other hand, if you think rates could tick up even further, it may make sense to portion your funds appropriately. This could mean opening a long-term CD with some funds now and another with the remaining funds in the future. This laddering approach will guarantee that you always have a CD ready to re-enroll at a different rate in the future.
The bottom line
A long-term CD isn't for everyone. But it can make sense for some savers now. To get the most benefit — and greatest return — they should deposit the right amount of money for their personal situation. They can better determine an exact figure by understanding their long-term goals with the account and by knowing their budget and what they can afford to part with. They should also monitor the ongoing rate environment, as that could affect what they deposit into a long-term CD now and what they may do with those funds in the future.
