Here’s how much investing $1,000 in a CD right now will earn you

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If you're looking for a low-risk way to grow your savings, certificates of deposit (CDs) might be the perfect choice. With guaranteed returns and FDIC insurance, CDs offer a secure way to earn interest on your money. 

Even if you have only $1,000 to invest, you may be surprised at how much you can earn by putting your money into CDs.

“Now is a fantastic time for CDs, given the national average rates are currently higher than they’ve been in the past decade,” says Christopher M. Naghibi, executive vice president and CEO at First Foundation Bank. “A consumer can lock in rates now and be quite confident that they will get the best pricing they will see on a CD for the foreseeable future.”

Let’s explore how much you can earn by investing $1,000 in a CD today — including tips for maximizing your returns.

Current CD rates 

As of May 2024, the best interest rates for CDs are as follows:

• 6-month CD: up to 5.30% APY
• 1-year CD: up to 5.30% APY
• 3-year CD: up to 4.80% APY
• 5-year CD: up to 4.50% APY

Remember that rates can vary depending on the financial institution, location, and other factors.

How much you could make by depositing $1,000 into a CD 

So, what kind of returns can you expect on a $1,000 CD investment right now? Let's look at how much you could earn with a $1,000 initial deposit at the top rate. 

Calculations assume interest compounds annually, and you don't withdraw your money before maturity. Some banks offer different compounding frequencies, which can slightly affect your total earnings.

As you can see, the longer the CD term, the more interest you can potentially earn on your $1,000 investment. However, it's crucial to consider your financial goals and liquidity needs before committing to a longer-term CD.

What is a CD, and how does it work? 

A certificate of deposit is a type of savings account offered by banks and credit unions. When you open a CD, you agree to leave your money locked up for a specific term, ranging from a few months to several years. 

In exchange, you'll earn a fixed interest rate for the entire term of the CD.  You'll receive your initial deposit plus interest earned when your CD ends its term.

Many CDs have minimum initial deposit requirements. Requirements vary by bank but typically start at around $500 to $1,000.

Withdrawing money from a CD before its maturity date usually results in an early withdrawal penalty, which can eat into your earnings.

How do CD rates work?

When it comes to CD investing, rates are the name of the game. The higher the annual percentage yield (APY), the more you stand to earn on your deposit over the term of the CD.

Rates can vary depending on the financial institution, the CD term, and broader economic conditions. 

Naghibi sees a unique window of opportunity for CD investors: “We’re witnessing a mix of high yields and a trend towards declining rates. This means it’s the ideal time to lock in your best bet for your highest yield in CD rates before the Fed begins its rate-cutting cycle.”

What affects CD earnings?

Several key factors can impact the amount you earn from a CD investment.

• Interest rates: Economic factors, like inflation, the Federal Reserve's monetary policy, and market competition, affect CD rates. When the Fed raises interest rates, CD rates often follow suit, allowing savers to earn more on their deposits.
• CD term: Longer CD terms typically offer higher interest rates than shorter terms. This is because banks are willing to pay more for the assurance of having access to your money for a longer period. Right now, the opposite is true — shorter-term CDs typically pay higher yields than longer-term CDs. This is because the banks largely expect rates to fall in the future. 
• Compounding frequency: More frequent compounding (daily or monthly) will result in slightly higher returns compared to less frequent compounding (annually).
• Initial deposit: Some banks offer tiered interest rates based on the size of your initial deposit. Larger deposits may qualify for higher rates, so it's worth investing more than $1,000 if you can. 
• Early withdrawal penalties: If you need to access your funds before the CD matures, you'll likely face early withdrawal penalties. These penalties can vary widely between banks. 
• Inflation: While not directly related to the CD itself, inflation can impact the real value of your earnings over time. If the inflation rate exceeds your CD's rate, the purchasing power of your money may decrease, even though you're earning interest.

How to maximize your CD earnings

While shopping for the highest rates is a crucial first step, other factors can impact your CD earnings. Here are some tips to optimize your returns and ensure your money works as hard as possible.

Look beyond big banks

When finding the best CD rates, it pays to think outside the box. While the big national banks might offer convenience, they often lag behind in yield. 
Don't be afraid to consider lesser-known institutions, as long as they are FDIC or NCUA insured. You might be surprised at the rates you can find by looking at online banks, for example. 

Some banks offer special promotional rates for new customers or during limited-time offers. These rates can be higher than the standard rates, providing an opportunity to boost your earnings. Just be sure to read the fine print. 

Consider CD laddering

One of the biggest challenges of CD investing is balancing the desire for high rates with the need for liquidity. You don't want to lock up all your money for too long, but you don't want to miss out on the best yields.

That's where CD laddering comes in. With this strategy, you divide your investment into multiple CDs with staggered maturity dates. For example, instead of putting your entire $1,000 into a single 12-month CD, you might spread it across four CDs like this:

• $250 in a 3-month CD
• $250 in a 6-month CD
• $250 in a 9-month CD
• $250 in a 12-month CD

As each CD matures, you can either reinvest the funds into a new 12-month CD (to keep the ladder going) or withdraw the money if you need it for other purposes. This approach allows you to take advantage of higher long-term rates while maintaining regular access to a portion of your cash.

Diversify your portfolio

While CDs can be a valuable tool for savers, they shouldn't be the only arrow in your quiver. To maximize your long-term earnings, it's important to diversify your savings across a range of assets and account types.

By combining CDs with other investments – such as high-yield savings accounts, bonds, and stocks – you can create a well-rounded portfolio that balances liquidity and growth. The exact mix will depend on your age, risk tolerance, and financial goals, but the key is to avoid putting all your eggs in one basket.

Alternatives to CDs

While CDs can be a great choice for low-risk, stable returns, they're not the only option available. Depending on your finances and goals, you may want to consider some alternatives:

• High-yield savings accounts: Like CDs, high-yield savings accounts offer a safe place to store your money while earning interest. They typically provide more liquidity than CDs, allowing you to access your funds without penalty. Today’s top high-yield accounts offer rates similar to most CDs — around 4.50%-5%.
• Money market accounts: Money market accounts combine features of checking and savings accounts, offering competitive interest rates and limited check-writing privileges. They often require higher minimum balances than savings accounts but provide greater flexibility and liquidity.
• Bonds: Bonds are debt securities that pay fixed interest over a set term. They can offer higher returns than CDs but carry more risk, as their value can fluctuate based on interest rate changes and the issuer's creditworthiness.
• Dividend-paying stocks: For those comfortable with taking on more risk, dividend-paying stocks can provide a steady stream of income and the potential for capital appreciation. However, stock prices can be volatile and lack certain protections like FDIC insurance. 

The bottom line

A CD can be a great choice if you have $1,000 to invest. These accounts offer a low-risk, safe opportunity to grow your savings over time. By shopping around for the best deal, you can maximize your earnings and work towards your financial goals.

Remember, while the returns on a $1,000 CD investment may seem modest, saving and reinvesting your funds can lead to significant growth in the long run. As with any money decision, it's essential to consider your finances, risk tolerance, and liquidity needs before opening a CD. 

Editorial disclosure: Opinions expressed are the author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.