Ask a Nerd: How Much Money Should I Put Into CDs?
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Top rates on certificates of deposit are higher right now than they’ve been in years — 4% to 5% annual percentage yields — so it’s only fair to wonder if some of your money should be in a CD.
As with many money questions, the (annoying) answer is that it depends on your financial goals and circumstances. But let’s narrow down what the right sum might look like for you.
CDs are for some savings left untouched
A certificate of deposit is a type of savings account. It can be likened to a locked box: You put an upfront sum in, let the money grow uninterrupted for a predetermined period of months or years, known as a term, and then withdraw with interest. The rate of return is nearly always guaranteed upon opening a CD. But not all savings are fair game for CDs.
» COMPARE: Best CD rates
CDs aren’t best for an emergency fund. A standard rule of thumb is to have three to six months’ living expenses in a regular savings account in case of an emergency such as losing a job. Since an emergency fund should be easily and quickly available, a savings account is generally better for that money than CDs. Also, if you withdraw from a CD early, there’s usually a penalty equal to months or years of interest.
CDs aren’t for long-term savings either. When saving for retirement, a general rule is to invest 10% to 15% of your income each year or build up to that amount. Investing vehicles can include an individual retirement account or an employer-sponsored account such as a 401(k). And the money is often invested in some combination of stocks and bonds, which can have higher average returns than CDs.
CDs tend to work for savings not intended for emergencies or retirement. The best CD rates tend to be at online-focused institutions. “For mid-term goals like saving for large purchases or wanting to keep pace with normal inflation, some online bank CDs and brokered CDs are finally becoming nice landing places for those dollars now that interest rates have risen,” Derek Brainard, director of financial education at the AccessLex Institute, said in an email. AccessLex is a nonprofit that helps law students with money advice.
» Learn more about when CDs are worth it
Know a CD’s minimum
CDs have a typical minimum balance or opening requirement that’s often around $1,000, but it can range from $0 to $10,000. There are jumbo CDs, which have minimums traditionally around $100,000, though these CDs don’t necessarily have the best rates in the industry.
The minimum is more like a barrier to entry, one to heed but not to stick to as the recommended amount. You generally can’t add money to a CD after the initial deposit, so you’ll probably want to aim for an amount you don’t mind losing access to for some time and that'll earn a decent return. For a rough idea, use a CD calculator to plug in a deposit, CD term and rate. For example, $10,000 placed into a one-year CD at a 5% APY would earn $500 in interest.
Know a CD’s federally insured maximum
As with other bank accounts, a CD is federally insured for up to $250,000 at financial institutions that are members of one of two deposit insurance agencies: The Federal Deposit Insurance Corp. is the insurer for banks, and the National Credit Union Administration is the insurer for credit unions, which are the not-for-profit equivalent of banks. In rare cases, CDs might be available at a bank or financial firm that partners with a bank that’s a member of the FDIC.
Federal deposit insurance protects your money up to $250,000 if a bank collapses. A bank may allow you to deposit more than that limit if you’re fortunate to have that much, but if the recent bank failures, such as that of Silicon Valley Bank, have you worried about losing your money, it’s best to stay within the limit. The $250,000 cap includes all accounts you have at the same bank, such as CDs, checking and savings accounts.
4 tips for keeping your money in CDs insured
Here are four strategies:
Stay at or under $250,000. Ensure your CD deposit and the expected interest will total less than the $250,000 limit.
Open CDs in different ownership categories. For example, you could have one CD in your name, another in a joint account with someone else, and yet another as a trust with beneficiaries.
Opt for a brokered CD. This is a CD offered by a brokerage or investment firm. This type of CD can be more involved since you’ll need to open a brokerage account and know some basic investing vocabulary. A brokerage account can hold CDs from multiple banks, which allows for FDIC insurance above $250,000.
Open CDs at different banks or credit unions. This approach might also take more work, but you can take advantage of CDs at different rates and terms. A CD ladder is a common way to spread your funds across multiple CDs of different lengths, such as one-year, two-year and three-year terms. Each time a CD ends, you decide whether to reinvest in another CD or put the funds elsewhere.
» Want more tips? Here’s our guide to insuring over $250,000
Big picture: CDs fit in the cash portion of a portfolio
Here’s a broader way to think of CDs: A portfolio is your overall collection of assets, generally including stocks, bonds and cash. CDs reside as cash investments in the cash part of your portfolio, intended to be safe and used for goals within several years.
“Having around 5% or so of your overall portfolio in cash investments may make sense for long-term investors,” Rob Williams, certified financial planner and managing director of financial planning at Charles Schwab, said in an email. CDs and Treasury bills and notes can play a role as cash investments, Williams said.
Brainard, at AccessLex Institute, noted other factors to consider: “The specific allocations for stocks, bonds, and cash are generally based on an investor’s time horizon and risk tolerance, with a trend toward gradually holding more in cash and bonds as one nears and lives in retirement.”