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.

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. CDs can also help you keep your money in savings, reducing the temptation of spending on unplanned purchases.

Benefits of investing in short-term CDs

Quicker access to your interest earnings than with long-term CDs. Low risk when you invest with an FDIC- or NCUA-insured institution. Fixed, predictable returns that can shield you from market fluctuations. Various term durations available.

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.

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.

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.

CDs are generally safe investments. These accounts offer fixed, predictable returns that aren't affected by financial markets or the state of the economy once you lock in your rate. Moreover, CDs usually come with FDIC or NCUA insurance for up to $250,000 per depositor, per account.

Usually, long-term CDs pay higher interest rates than short-term ones. However, if you look at the best CD rates right now, you'll find 3-month, 6-month, and 1-year terms are actually more competitive than some longer-term CD rates.

Tax is due on short-term CDs, those with 1 Year or shorter terms, at maturity. Interest on longer-term CDs is taxed as it accrues during the CD term. IRAs that invest in CDs do not have to pay tax currently on the IRA CDs' income or gains. Here's what you need to know.

Why should you deposit $5000 in CD now? ›

For context, in 2021, when rates were around their lowest, the national average 12-month CD had an APY of just 0.15%. For a $5,000 deposit, this is the difference between earning $250 in interest over a year versus earning only $7.50 over that same time frame.

Reasons To Avoid Locking Your Money Up

Also be aware that, just as rates can drop, they can also go up based on moves made by the Federal Reserve. In that case, parking your money in a CD means you may wind up with a lower return than you would earn with a high-yield savings account.

Yes, a three-month CD can be worth it if you're looking for a safe, FDIC-insured account that earns guaranteed interest on money you'd otherwise leave untouched in a checking or savings account.

The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.

Market Crashes and CDs

Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.

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.

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.

Early Withdrawal Penalties

The most common way people lose money through a CD account is by withdrawing their funds before the term ends.

The roles of CDs in your portfolio

They offer a guaranteed return over a set period with no chance of market-based losses. In exchange, they offer less liquid access to your cash than a savings account and lower long-term returns than the stock market. For this reason, CD accounts shouldn't take up all your money.

If your goal is to lock in a high rate of interest on funds you don't need to access for a period of time, a CD might be your best option. However, a high-yield savings account may be the better choice if you want to earn solid interest on your savings while still keeping the money relatively accessible.