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MoneyWatch: Managing Your Money
By Ben Geier
Edited By Angelica Leicht
/ CBS News
There are a lot of options available to you to hold the money you're saving. There are savings accounts, checking accounts and investment options. One choice that may not come to mind immediately, though, is to put your money into a certificate of deposit (CD). A CD is an account with a bank or financial institution, and when you use one to store your money, you agree to leave it untouched for a specified period of time in exchange for earning interest.
Generally, a certificate of deposit offers you a higher interest rate than other savings products because you agree to keep the money in the bank for a certain term – normally between three tosix months and five years. You can open a CD with most banks, but for the best rates, it may benefit you to consider an online-only financial institution. These banks have less overhead and, in turn, canoffer much better rates to consumers.
Get started with CD investing right now.
How much does a $10,000 CD make in five years?
First, let's take a look at how much you could earn if you got the national average CD rate. Right now, the average interest rate for a 5-year CD is 1.46%. If you put $10,000 into a CD with that rate right now, after five years you'd have earned $751.63, for a total of $10,751.63.
As noted above, though, you can likely get a much better interest rate if you shop around and find a CD from an online bank. Right now, some online banks are offering rates up to 4.65% on 5-year CDs. If you put $10,000 into a CD with that rate right now, you'd end up earning $2,551.52 in interest by the end of the term, leaving you with a total of $12,551.52.
One thing worth noting is that while normally longer-term CDs have higher interest rates, right now, many shorter-term CDs actually offer higher interest rates than 5-year CDs. In turn, it can be tempting to put your money in a short-term CD and then reinvest it in a new CD after it matures.
The problem with this plan is that CD rates constantly change. Right now, CD rates are very high, driven in large part by high federal rates set at the Federal Reserve. At some point, though, the Fed will drop rates and CD interest will go down. If you deposit money in a 5-year CD right now, however, you'll lock in that high rate for the full term.
Shop for certificates of deposit online today.
How CDs fit into your portfolio
Certificates of deposit are useful for a variety of reasons. For starters, it's not typically wise toinvest all your money in the stock market. Some of it should be in safer vehicles like savings products. Most people look to a regular savings account for this purpose, but those generally don't offer very competitive interest rates. CDs offer better rates — especially right now.
CDs also require you to keep the money in the bank for a set amount of time — which can be both good and bad. It's good because you can't make rash decisions and use your savings on an unnecessary purchase. The downside, though, is that if you have an emergency, you won't have access to that money unless you are willing to pay the early withdrawal penalty that most banks charge.
Overall, CDs can be a very useful part of a savings plan – but probably should not be the only way you save money.
The bottom line
If you put $10,000 in a 5-year CD right now, you could be looking at earnings of more than $2,000 when the CD matures. Ultimately, CDs can be part of a successful financial strategy, as long as you make the right choices and shop for the best available rate.
Ben Geier
Ben Geier is a personal finance writer based in Brooklyn, New York.
