Why you should put $10,000 into a short-term CD right away (2024)

FAQs

Why you should put $10,000 into a short-term CD right away? ›

While a short-term CD isn't going to net you a fortune, it will allow you to have your money work for you in a way it wouldn't if it were sitting in a checking account or regular savings account. If you put $10,000 into a 3-month CD with an interest rate of 5.10%, your total interest earned would be around $125.

The top nationwide rate in each CD term—from 6 months to 5 years—currently ranges from 5.20% to 6.18% APY. With a $10,000 investment in a top-paying CD, you can earn hundreds to thousands of dollars of interest on your money—and much more than if you keep it in a typical savings account.

"You don't want to use short-term CD's if you're investing for a goal that is longer than three years out unless you are incredibly risk-averse," Maula says. For long-term goals, you'll want a long-term CD, which would allow you to lock in today's interest rates for five or even 10 years.

Earnings are predictable

When you start a CD, you can figure out how much interest you'll earn during the term. Here's an example of the interest you could earn for each CD term listed above with a $15,000 deposit: - 6-month CD at 5.55%: You'd earn $410.63 in interest, making the total value $15,410.63.

If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.

CD Cons. Banks and credit unions can penalize savers who withdraw CD funds before maturity. CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs.

A three-month CD may be worth it if you don't plan to withdraw funds early and you get a better APY than money market and savings accounts offer. It can also be worth it if you like a shorter commitment or want to create a CD ladder with multiple maturity dates.

Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD.

After climbing for the past couple of years, CD rates appear to be flattening out and will likely decline later this year. CD rates tend to track the federal funds rate. If the Fed rate goes up, CD rates increase, and vice versa. The Federal Reserve has held the federal funds rate steady since September of last year.

What is the catch with putting your money in a CD? ›

If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate you agreed to when you opened the account. And if you take your money out before a CD matures, you'll pay a penalty -- typically three months of interest.

Paying an early withdrawal penalty could also make sense if your CD is earning considerably less than current interest rates. For example, if you have a long-term CD earning a 2% APY, and new CDs offer APYs in the 5% range, you should consider cashing out your long-term CD as it could mean earning 3% more on your cash.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

CD rates are at a 3-year high—but waiting longer to buy could be a gamble. Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed's rate hikes. The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022.

For those who won't need access to the cash in the short term, now is a chance to lock in strong CD rates. CDs can also be valuable for those tempted to dip into their savings accounts to make unnecessary expenses. Early withdrawal penalties should help dissuade investors from accessing money in a CD before it matures.

Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.

CD rates are at a 3-year high—but waiting longer to buy could be a gamble. Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed's rate hikes. The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022.

While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.

Inflation is running higher than your CD's return.

Inflation plays an important role in understanding how much your money is actually worth. While you may not feel like you're losing money in a CD if you're following the rules and waiting to withdraw at maturity, you can be losing purchasing power.

CD accounts earn less on average than the stock market and mutual funds. That's the trade-off of getting a guaranteed return versus the unpredictable swings of market investments. When you lock in a CD rate, it might not grow your money enough during high inflation periods when prices are going up.