Certificates of deposit (CDs) have a lot going for them. You deposit funds into an account for an agreed period of time in exchange for guaranteed returns. The best CD rates are usually a lot higher than what you’ll get from a traditional savings account. Since there’s little risk involved and CDs are FDIC-insured up to $250,000, they’re one of the safest options for your savings. To help you figure out what CD term to choose, we’ll give examples of how much you could earn on $25,000 in CDs with different term lengths.
Key Takeaways
- A CD is a type of savings account that earns a guaranteed interest rate over a set period.
- You’ll see how much interest you’ll earn when you open the account and specify your deposit amount.
- Depositing $25,000 in a CD will earn you hundreds to thousands of dollars in interest, depending on the term you select.
How Much Can You Earn With a CD?
The way a CD works is simple. You choose a term length for your certificate of deposit and you’ll get a fixed interest rate as long as you keep the money in the account for the agreed upon time. If you withdraw money before the term is up, you’ll be hit with a steep early withdrawal fee. Once the term is up, you can withdraw the funds (plus all that interest you earned) or reinvest them into a new.
Banks and credit unions promote their CDs by annual percentage yield (APY), which measures potential earnings over a year, including compounding interest.
To give you an idea of how much you might be able to earn on $25,000, we played around with several scenarios. We started by looking at the best CD rates based on term length. Then, we entered hypothetical APYs into a CD calculator and specified the term length. As you can see, shorter terms yield less, only a few hundred dollars compared to the thousands you could make by leaving the money in for several years.
Considerations Before You Invest in a CD
You’ve seen how much you can earn in interest with a CD, but some CDs have caps on how much you can deposit. Plus, you’ll likely face a steep penalty if you want to withdraw your funds before the CD term is up.
We also should mention that CDs sometimes struggle to keep up with inflation. Since a CD’s interest rates are fixed, if borrowing rates climb quickly, you might end up locking in your money at a low rate. If you put all of your savings into a CD and inflation increases, you might find it’s a poor investment. Instead, you might put your savings into a high-yield savings account, money market account, mutual funds, or a mixture of these.
The Bottom Line
A CD can be a great savings tool, earning you hundreds to thousands of dollars in interest over the life of the term. But, since CDs lock up your money for a set period of time, you should have alternate savings accounts as well, so you can access funds as needed and without penalty.
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