Even if inflation is now moving at a slower rate, the Federal Reserve still doesn’t want it to be at this level. The Fed has continued to raise interest rates because of this, most recently in July. Many Americans have seen their purchasing power decline as a result of rising inflation and the Fed’s rate increases.
However, increased rates for financial instruments like certificates of deposit (CDs) offer customers a chance to increase their savings while taking on relatively little risk.
With $10,000, you might make hundreds of dollars annually and outperform inflation by investing it in interest-bearing products like CDs. Nevertheless, keep in mind that CD interest, like other types of interest, is often taxed as regular income.
Here, start looking into your CD alternatives to see how much extra interest you might be able to generate.
How much interest will a $10,000 CD earn?
It is necessary to look at current CD interest rates, which might vary depending on the provider and the duration, in order to calculate the precise amount of money you can receive from opening a $10,000 CD. Frequently, the yield on a long-term CD is higher than that on a short-term CD. Although many long-term CDs now provide lower interest rates than short-term ones as a result of the changing economic climate.
According to the FDIC, a 12-month CD has the highest average interest rate of any CD term as of July 17, 2023, paying an average yearly yield of 1.72%. A five-year CD typically yields 1.37% interest. A $10,000, 12-month CD would earn $172 based on these averages. After taking into account annual compounding, a five-year CD would generate $137 after the first year and, after those five years, a total of $704 would be earned.
These numbers, however, only provide a partial picture. You can get CDs with substantially greater prices if you shop around. Many five-year high-yield CDs pay around 4% annual percentage yield (APY), and many 12-month CDs often pay around 5% APY. $10,000 would provide $500 in income per year at 5%. Based on annual compounding, a 5-year, $10,000 CD at 4% would return $2,167 during that time.
Deciding what’s right for you
Your financial objectives will determine whether you choose one of these terms or another period. Keeping your money in a long-term CD may prevent you from earning returns elsewhere, so it’s not always a matter of choosing the one with the highest total interest rate.
According to Ryan M. Vogel, CFP, chief planning strategist and partner at Novi Wealth, “the best way to determine the length of time of a CD is to match up maturity with a planned expense.”
For instance, you might want the relative certainty and principle protection that come with investing $10,000 in a five-year CD if you know that you will need to pay for your children’s tuition in five years.
But not everyone should use CDs, in Vogel’s opinion.
A diverse portfolio of equities and bonds that is compatible with your goals and risk tolerance is the ideal choice, according to him, if your time horizon for investing is undetermined.
Another option is to choose between investing $10,000 in a CD and other interest-bearing accounts, such high-yield savings accounts.
“Basically, it depends on whether or not the $10,000 is needed at that time. For instance, bonds and CDs are bad investments for emergency needs. According to Holly P. Donaldson, CFP at Holly Donaldson Financial Planning, LLC, savings accounts should be utilized to accumulate those.
The set interest rate of a CD, as opposed to the variable rates of savings or money market accounts, may, nevertheless, be attractive if you do have additional cash to save. Even though 9- or 12-month CDs might pay the same as or even less than savings accounts right now, Donaldson points out that things might change by the time the CD matures.
Another thing to think about, if it’s an option, is whether to take out CD interest along the way, knowing that doing so will reduce your overall interest earnings, as opposed to leaving CD interest in the account to compound.
A comparison of your CD rate to current interest rates will help you decide whether to take the interest from the CD or keep it reinvested in the CD account. If the interest rate on the current CD is substantially lower than the market rate, take the interest and reinvest it. If rates are lower than your present CD, Vogel advises investing and letting the money build.
Finally, if you invest $10,000 in a CD, you might be able to make a sizable yield, but keep in mind that interest rates aren’t the only thing to consider. Convenience is another point made by Donaldson. For instance, online brokerages can make it simple to locate bank CDs that correspond to your preferred maturity date.
If you can locate a CD that fits your financial objectives and is reasonable from a convenience standpoint, you might decide to invest $10,000 in it. You can still grow your money with a CD, though, as many have no minimums, even if you don’t have that much to save.
The takeaway
Selecting an account with a higher APY, fewer expenses, and a term that suits your needs for saves and spending might result in bigger savings in the future if you are deliberate about where you deposit your money.
