A CD, or certificate of deposit, is a safe way to save money for short and medium term financial goals. CDs offer the trade-off between higher interest rates and lower liquidity compared to traditional savings accounts. You buy a CD for a fixed interest rate and a maturity date, usually between three months and five years from when you open the account. If you decide to withdraw money before then, you will be subject to penalties, which will make CDs more lucrative when you can afford to leave them untouched.
If you deposit too much, you risk your profit by incurring penalties if you need your money. If you deposit too little, you risk not reaching our savings goal – or not being able to open the CD in the first place.
What is the minimum deposit for a CD?
CDs require minimum deposits, just like savings accounts, but they are usually higher. The minimum deposit to buy a CD varies by bank and CD type, but it usually ranges between $500 and $1,000. Some banks offer Giant CDs with a minimum deposit of $95,000 or more.
How much should you put in a CD?
Your optimal CD deposit amount depends on the duration of the CD, early withdrawal penalties and how much you are saving. But you’ll also have to play defensively by considering how much money you should keep on hand for unexpected expenses.
How much of an emergency fund do you need?
Experts recommend having enough money saved to cover at least six months of expenses in case something happens, like job loss. So if you’re spending $800 a month on expenses and saving $10,000 a year, you should have at least $4,800 saved in cash. How much do you keep on a CD versus a high yield savings account – which offers better liquidity – will depend on how quickly you may need to access that money. In most cases, putting money into a CD that you will need before maturity is a fruitless endeavor.
How much do you need to save to reach your goals?
For any additional savings beyond your emergency fund, you need to think about how much you need to save for a short-term or long-term goal. If it’s a shorter-term goal, like a down payment on a house, a CD can be a great place to store your money safely while earning a competitive return. The stock market, on the other hand, would be too volatile for short-term savings goals.
If you’re saving for retirement or another long-term goal, you might want to opt for Tax-sheltered savings and investment vehicles on CDs.
Match your deposit and interest rate to your bank’s early withdrawal policy to help you determine your deposit amount. For example, a penalty may be 90 days of interest or a minimum fixed charge, such as $25. If a potential withdrawal is costing you more money than the interest is earning you, you may want to reduce your deposit.
How much will you earn in interest on a CD?
The amount you will earn in interest on a CD depends on the term of the CD, the interest rate at the time of purchase, and the specific bank or credit union. Compared to money market accounts and savings accounts, CDs generally offer the highest return. But it is important to note interest rate on a CD is fixed, so if market interest rates rise, you won’t earn any additional interest on your CD. The APY, or Annual Percentage Yield, reflects the total amount of interest paid on the account over the course of a year.
The bottom line
You will need to keep at least the minimum deposit on a CD – usually $500 or $1000. But the longer you keep, the more interest you will earn. Withdrawing some of your money from a CD before the CD’s maturity date comes with penalties, and the length of time your money is tied up in a CD is determined by the duration of the CD.