Certificates of deposit (CDs) are one of the safest ways to grow your money. The current yields on CDs are nowhere near the long-term returns of the stock market. However, you can still earn a lot of money with CDs if you invest a large amount — and your returns are guaranteed.
So what would it take to earn $10,000 by investing in CDs today? It depends on the CD’s interest rate, the term, and how much you invest. Let’s look at a couple of scenarios and see if CDs are a good place for your money now.
5-year CD
The longer your money is invested, the more it’ll grow. So let’s assume you invest in a 5-year CD — the longest term available at most banks.
The best 5-year CD rates are around 4.00%. At that rate, you’d need to invest $46,160 to earn $10,000 by the time your 5-year CD matured.
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1-year CD
You’d need to invest a lot more money in a 1-year CD to earn $10,000. That said, 1-year CDs have slightly higher APYs than 5-year CDs — around 4.30% at the high end.
You’d need to invest about $233,000 to earn $10,000 from a 1-year CD paying 4.30%.
Want to earn the same interest rate as a CD without locking up your money for years? Check out our list of the best high-yield savings accounts, which pay up to 4.50%.
Hypothetical: 3.75% APY for 10 years
You can always reinvest your money in new CDs once the old ones mature. In other words, you can earn $10,000 over a much longer time frame than five years.
We don’t know what interest rates will be in the future, but let’s assume they drop about 25 basis points (as some experts predict) and then remain stable.
At a 3.75% APY, you could earn $10,000 over 10 years by investing about $22,500 in a 5-year CD, then moving that money to another 5-year CD once the first one matures.
Are CDs even worth it?
Certificates of deposit make sense if you have a large amount of cash that you need to keep safe for years while earning a low but guaranteed return.
For building your wealth, however, you’re probably better off investing in the stock market. Since 1957, the U.S. stock market (as measured by the S&P 500 Index) has gained an average of 10% per year.
Stock returns fluctuate, and losses are guaranteed to happen sometimes. But if the S&P 500 were to gain 10% per year over the next five years, it would only take an investment of $16,400 to earn an additional $10,000.
CDs are great for people who are looking to preserve their wealth, rather than build wealth. However, most of us will need a higher return than 4% per year to achieve our biggest financial goals, like saving for retirement.
If you’re new to stock market investing, consider opening a new brokerage account and purchasing a low-fee S&P 500 index fund. You’ll instantly be invested in 500 of the biggest, most successful companies in the U.S. And if the stock market’s past returns hold up, you’ll be on track to earn far more money than you could with any CD.
