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How Much Money Should You Put in a CD?

When you have extra money to set aside, a certificate of deposit (CD) can be a great option. Unlike regular savings accounts, CDs require an upfront deposit that you typically can’t touch until the term ends. Early withdrawals usually result in penalties. While CDs lack flexibility, they offer higher interest rates and are safer than stock investments. Here are some factors to consider when deciding how much money to put in a CD.

Your Financial Position

Traditional CDs require an upfront deposit that earns interest monthly at a designated annual percentage yield (APY). You can choose the term and deposit amount, which determine the APY offered. Terms can range from a few months to several years; generally, the longer the term, the higher the APY.

Since CDs lack liquidity, consider how much money you can afford to temporarily lose access to. Ensure you have enough in your emergency fund or other accounts to avoid dipping into your CD prematurely and incurring fees.

CDs grow existing savings through interest; you generally can’t contribute more after your initial deposit. If you want to add to your savings regularly, a savings account might be better. Some financial institutions offer add-on CDs, which allow deposits after the account opening, but these are less common.

Your Financial Goals

Your financial goals and their timeframes are crucial when deciding how much to put in a CD. CDs come in various terms, from a few months to several years. Longer terms earn higher interest rates, but think carefully about the ideal term length given your savings goals.

For short-term goals like a vacation or wedding, a short-term CD of six months might be ideal. For mid-range goals like having a baby or renovating your home, consider CDs with terms of one to two years. For long-term goals like a house down payment, a CD for five or six years could be suitable.

CD laddering is a strategy for those seeking greater flexibility. This involves taking out multiple CDs with varying terms to stagger their maturity, allowing regular access to your funds without sacrificing too much in higher yields.

Your Chosen CD’s Minimums

CDs require a minimum deposit to open the account, which will grow each month as it accrues interest. Some CDs, especially those with higher APYs, have higher minimums than others. Evaluate how much you can part with for your chosen term and choose a CD with a minimum amount your budget can afford.

If money is tight, start with a CD with a small minimum balance requirement, like $500, or a short term, such as six months. Both can offer greater flexibility if you might need that money soon or don’t have much to set aside.

The CD’s Federal Insurance Maximums

CDs are insured by the federal government, ensuring you get your money back should your financial institution fail. However, FDIC and NCUA insurance has limits. Both automatically cover $250,000 per customer, per account type, per bank or credit union.

If your total balance at a bank or credit union exceeds that amount, you would only be covered for $250,000 of it. To avoid this risk, open a CD at a different bank or credit union, or increase your coverage by making your CD a joint account with a trusted loved one.

Explore Other Savings Options

CDs can be excellent savings vehicles, especially if you’ve already saved up money and need a place to set it aside and let it grow safely. However, they may not be the best fit for those who don’t have much saved yet or want an account they can regularly deposit or withdraw from.

In those cases, consider a high-yield savings account, which doesn’t limit deposits and has fewer withdrawal limits. While interest rates on savings accounts may not be as high as CDs, yields are better than traditional savings accounts, and every little bit adds up.

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