Savings accounts are great for money you want to earmark for emergency expenses and near-term goals, like saving for a car, vacation, or house. But if you've covered those bases and have more unallocated cash on hand, you're left with an interesting problem -- how to generate the best return on your money for the long term.
One option is to invest it in a certificate of deposit (CD) with a five-year term. While in the past, 5-year CDs had generally lackluster returns, today's rate environment has made these deposit accounts far more lucrative. If you have a long time horizon and you want to earn a decent return on a safe investment, let's see how much $20,000 could make in a 5-year CD.
How much will $20K be worth in five years?
Before we get to the math, let's establish some ground rules. First off, the CDs mentioned below pay compound interest. That means, your CD rate not only applies to your initial deposit but also to the interest you've already accumulated. This is different from simple interest, which would just apply to your principal and not the interest you've already earned.
Secondly, we have to assume you won't withdraw the interest early. While many banks will let you take out interest periodically, doing so reduces your balances and will thus result in slightly less interest earned overall. Keep in mind that withdrawing interest is different than removing your initial deposit, which is against the rules and will likely result in paying an early withdrawal penalty.
Thirdly, the rates mentioned below are current as of April 21, 2024, but they could change at any moment. Check with the bank itself to see what its current rates are.
Now that we got those assumptions out of the way, let's take a look at how much you could earn with $20,000 in some of today's top-paying 5-year CDs.
| Bank | CD rate | Balance at the end of term | Total interest earned |
|---|
| Barclays Online | 3.75% | $24,042 | $4,042 |
| Ally | 3.90% | $24,216.30 | $4,216.30 |
| LendingClub | 4.00% | $24,333.06 | $4,333.06 |
| Bread Savings | 4.15% | $24,509.04 | $4,509.04 |
| Quontic | 4.30% | $25,686.05 | $4,686.05 |
Data source: Author's calculations
So, no matter which 5-year CD you choose, you're going to earn between $4,000 and $4,700 on a $20,000 deposit at today's best rates. Keep in mind, you have to pay taxes on CD interest, so your total return could be less. Still, this is a decent return for a relatively risk-free investment.
Should you open a 5-year CD?
A big reason to open any CD of any term is to freeze today's high interest rates. To be sure, today's best CD rates won't be around forever; in fact, by many expert predictions, banks might start lowering CD rates later this year. While no one can predict when CD rates will change, it might be prudent to lock one in before rates begin to shift.
As far as 5-year CDs go, these longer terms best suit those who have extra savings in another bank account, like a high-yield savings or checking account, and don't plan to use this money for the next 60 months or longer. Moving this money into a 5-year CD would entitle you to a decent return on your savings, one that could be substantially higher than what other bank accounts could pay over the same duration. It's entirely possible that in two to three years, the best savings rate will be less than half what it is now.
Ideally, this money shouldn't be already tied up in investments in a brokerage account, nor should it come from your emergency fund. Since 60 months is a long time to lock up your money, it should be savings you don't have earmarked for short-term goals.
All things considered, 5-year CDs are paying out at super generous rates. If you can commit some of your savings to one of these accounts, you can establish a decent stream of passive income. However, if locking your money up for the length of a presidential term plus a year scares you, don't sweat it -- take a look at some of the top-paying short-term CDs (like 12-month terms) and see if they might suit your time horizon better.
FAQs
With a traditional CD, you typically make a one-time opening deposit and leave it in the account until the end of the term. You can't continually add money to this type of CD. However, you can opt to open an add-on CD, which allows you to make additional deposits throughout the CD's lifetime.
How much money do you make on a $5000 CD? ›
Today's top CD rates by term
| CD term | Institution offering top APY | Estimated earnings on $5,000 with top APY |
|---|
| 1-year | Bread Savings | $255 |
| 18-month | Bask Bank | $372 |
| 2-year | Bask Bank | $486 |
| 3-year | TAB Bank | $681 |
5 more rows2 days ago
CDs won't make you rich, but they can lock in safe returns. Say you're a retiree with $50,000 to invest. If you put $50,000 into a 1-year CD with a 5.00% APY, you'd have $2,500 more when your CD term expires, even if rates have gone down since. CDs are safe places to store short-term savings.
What is the biggest negative of putting your money in a CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
How much will a $500 CD make in 5 years? ›
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
Is a 5-year CD a good idea? ›
Most 5-year CDs offer the ability to earn a high APY. Right now you'll find top rates of between 3.75% and 4.35% APY. That's high compared with the current national average on 5-year CDs (1.38%!) as reported by the FDIC. While getting a high APY is important, it's not the only factor to take into account.
How much can I make with $10000 CD? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 3 months | 1.60% | $40.05 |
| 6 months | 2.53% | $127.17 |
| 1 year | 2.57% | $260.05 |
| 18 months | 2.18% | $332.10 |
3 more rowsAug 8, 2024
Best 5-Year CD Rates
- Pima Federal Credit Union – 4.50% APY.
- Department of Commerce Federal Credit Union – 4.45% APY.
- The Federal Savings Bank – 4.45% APY.
- First Internet Bank – 4.35% APY.
- Lafayette Federal Credit Union – 4.32% APY.
- Transportation Federal Credit Union – 4.30% APY.
- Credit Human – 4.25% APY.
Bottom Line. CDs can be a safe way to earn a little interest on your savings over a set period of time. But don't put more money in CDs than you can afford to lose access to for the length of the CD's term. Once your money is in a CD, you generally can't touch it without penalty until it matures.
Is it worth putting $10,000 in a CD? ›
The bottom line. A $10,000 deposit into a 6-month CD is a smart and safe way to grow and protect your money right now. By doing so, you won't lock up your funds for an extended period but you'll still overcome some rate uncertainty during that period.
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Do you pay taxes on CDs? ›
The taxes on CDs are similar to those on other types of interest income, such as interest earned on bonds. Both are considered taxable income and subject to federal income tax, which is based on your marginal tax bracket. However, there are some investments, such as stocks and mutual funds, which are taxed differently.
Can you lose money by putting it in a CD? ›
Bottom line. Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date.
Are CDs 100% safe? ›
Safety. Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That's because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you're covered in case the bank shuts down or goes out of business.
Is it worth putting money in a CD right now? ›
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.
Can you add additional funds to a CD? ›
You cannot add money to most CDs. Typically, CDs only allow you deposit money when you open the account. Then you must leave your account balance untouched until your CD reaches maturity. One specialty CD is an exception to this rule — an add-on CD.
Can you gradually add money to a CD? ›
CDs tend to have higher rates than other bank accounts do, but most CDs don't allow you to add money gradually.
When a CD matures, can you add to it? ›
If you like the safety and stability of this savings vehicle and are satisfied with the APYs, another option after your CD matures is to put more money into CDs by building a CD ladder. This allows you to capitalize on interest rate changes, avoid early withdrawal penalties and save for different financial goals.
Is there a limit to how much money you can put in a CD? ›
That said, there are factors that could lead you to limit your deposit amount — including the maximum amount your CD account is insured for by the NCUA or FDIC, which is typically $250,000 per depositor, per account. "There is no hard and fast rule on the maximum amount," says Kevin L.
