Saving money can be like doing an uphill obstacle course. Not only do you need to squeeze cash from your budget so that you can save it, but you also need to figure out which account makes the most sense. With top CD rates at more than 5% right now, they can certainly be a lucrative option. The question is, how profitable are they really?
What makes a CD lucrative?
CDs come in different flavors. For the most part, when you put money into a CD you commit to leaving it alone for the full CD term. Otherwise, you will have to pay an early withdrawal penalty which can eat into your gains.
Assuming you don’t withdraw your funds early, the following factors will influence how much money you might make from a CD:
- The amount you invest
- The length of the CD (also known as the CD term)
- The CD’s APY
- Whether you reinvest your interest along the way
One great thing about a CD is that the APY is locked in for the whole time. So, unlike, say a high-yield savings account, you know exactly what you’ll get. If you open a 3-year CD today with an APY of 4.00%, that’s the rate you will get for the whole three years. If you put $5,000 into that CD and reinvested your gains, it would earn almost $625 in total.
Our Picks for the Best High-Yield Savings Accounts of 2024
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American Express® High Yield Savings  APY 4.25% Rate info 4.25% annual percentage yield as of August 1, 2024 Min. to earn $1 Member FDIC. |
APY 4.25% Rate info 4.25% annual percentage yield as of August 1, 2024 |
Min. to earn $1 |
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UFB Portfolio Savings Account  APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you’ll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. Min. to earn $0 Member FDIC. |
APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you’ll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. |
Min. to earn $0 |
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Western Alliance Bank High-Yield Savings Premier  APY 5.31% Rate info 5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Member FDIC. |
APY 5.31% Rate info 5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. |
Min. to earn $500 to open, $0.01 for max APY |
Here’s how lucrative buying CDs can be
The current high interest rate environment has turned CD logic on its head. It used to be that you’d get a higher rate if you were willing to lock your money away for a longer period. But right now, banks think the Federal Reserve will cut rates in the near-ish future. That means you can get higher APYs on shorter terms because banks don’t want to commit to paying today’s high rates for longer periods.
If you put $1,000 into a CD
As with many financial products, it is important to shop around to find the best deal for your situation. Some banks might pay extremely competitive rates on short-term CDs, while others may stand out for their longer-term options. Others might have minimum deposit requirements that don’t fit with your finances.
Here’s how much you might make if you put $1,000 into various CD terms available today:
| Length of time | APY | Interest |
|---|---|---|
| 6 months | 5.10% | $25.18 |
| 1 year | 5.25% | $52.50 |
| 5 years | 4.65% | $255.15 |
Data: Author calculations. Assume gains are reinvested.
If you put $5,000 into a CD
Some top CDs have higher minimum deposit requirements. As such, if you’re able to invest $5,000 you may be able to unlock better rates. Here’s how much you might make if you put $5,000 into various CD terms today:
| Length of time | APY | Interest |
|---|---|---|
| 6 months | 5.10% | $125.91 |
| 1 year | 5.25% | $262.50 |
| 5 years | 4.65% | $1,275.76 |
Data: Author calculations. Assume gains are reinvested.
If you put $10,000 into a CD
If you’ve got $10,000 in savings, congratulations. It’s a significant amount. Before we jump into what you might gain by putting that money into CDs, it is worth thinking about whether CDs are the best place for that kind of money.
CDs are savings vehicles rather than investments. That makes them safer than, say, investing in the stock market. But you might be able to get better returns through an investment account. This is especially true if you have an emergency fund and you know you won’t want to touch that money for the coming five to 10 years.
That said, there are many scenarios where lower-risk saving strategies make sense. Here’s how much interest $10,000 in CDs could generate.
| Length of time | APY | Interest |
|---|---|---|
| 6 months | 5.10% | $251.83 |
| 1 year | 5.25% | $525.00 |
| 5 years | 4.65% | $2,551.52 |
Data: Author calculations. Assume gains are reinvested.
CD laddering
If you have $5,000 or $10,000 to put into a CD, it is worth looking into CD laddering. This involves splitting your money into different CD terms — perhaps you’d break it into 1-year, 2-year, 3-year, 4-year, and 5-year CDs. The advantage here is more flexibility. Rather than locking up a lump sum for a long period of time, you’d be able to access your money when each individual CD matures.
It is a bit harder to predict how profitable this would be because we don’t know what rates will be available when each CD matures. There’s certainly an argument for locking in today’s high rates on the basis that they won’t last forever. Conversely, if flexibility is more important than getting the highest APYs, a CD ladder could make sense.
Bottom line
Depending on how much you can put in a CD, today’s high rates can make them an extremely lucrative option. When you’re running the numbers, bear in mind that these APYs are unusual. At some point, the Fed will cut rates, and savings rates will fall. There’s a lot to be said for locking them in while they last.
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