Why you should put $5,000 into a 5-year CD right now
Saving money is important for those looking to secure their future. No matter what you want to do when you get older, you'll need money to do it, and unless you want to continue working into old age, it's important to save money now, during your working years.
There are a lot of ways to save money, including tax-advantaged retirement plans and savings accounts. The key is to make sure your money is working for you rather than simply sitting idle in a checking account.
One option that is currently attractive is a long-term certificate of deposit (CD). Putting $5,000 into a 5-year CD right now could leave you with hefty returns at the end of the term, and the best part is that a CD is essentially risk-free.
Start saving with a CD and learn more here.
Why you should put $5,000 into a 5-year CD right now
While every situation is different, this choice makes sense for a lot of savers. Here's why:
Rates are very high
The key to a smart CD strategy is to get as high of an interest rate as possible. Right now, rates are higher than usual, due in part to repeated rate hikes by the Federal Reserve. While the Fed does not directly set interest rates for lending and saving products, the rates offered by financial institutions tend to mirror the Fed's rate movements.
As of November 2023, you can get rates of up to 4.75% on a five-year CD. Keep in mind that these high rates generally come from online banks rather than traditional large financial institutions, as bigger banks have higher overheads. They have to pay expenses for their physical locations that online banks do not have. The smaller, online-only institutions can, in turn, pass those savings along to customers in the form of higher rates.
Find out what you could earn with a top CD here.
Your rate won't change during the CD term
One of the best parts of depositing your savings in a CD is that the rate is fixed, meaning that it will not change before the CD matures. So, if rates decline during your 5-year CD term, you'll continue to earn the same 4.75% interest rate you locked in when you opened the account.
Interest rates for high-yield savings accounts are also very high right now. However, high-yield savings accounts have variable rates, which means that when the rate environment declines, the rate you earn with a high-yield savings account will also drop — resulting in lower returns on your savings.
The earnings are guaranteed and predictable
When you open a CD, it's clear exactly how much money you'll earn in interest by the end of the CD term. It's just a matter of applying the interest rate and doing some simple math.
If you put $5,000 into a 5-year CD with a 4.75% interest rate, by the end of the CD's term you'll have earned $1,305.80 in interest for a total balance of $6,305.80.
There are certainly investing options that have the potential to earn more money over five years, like the stock market, but those also come with substantial risk. You won't lose money in a CD because the returns are guaranteed and you are insured by the FDIC for up to $250,000.
The bottom line
Putting $5,000 into a 5-year CD right now can be a great option for savers – as long as you're sure that you won't need it during CD term, as early withdrawals can come with significant penalties. A CD is a safe, efficient way to save your money, though, especially when rates are as high as they are currently.
