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How Much Can You Earn With the Best CD Rates?

Banking, CDs
How Much Can You Really Earn With the Best CD Rates?

Today’s interest rates are pretty ho-hum across the board. They’re so low that you may be wondering if moving your money to another investment is worth the trouble.

Even at current rates, small differences in earned interest can add up, especially if your investment is sizable and you’re willing to give it some time. Are high-yield CDs still your best option? If so, how much can you realistically expect to earn?

Comparing the averages

For those who can live with the risk of losing some of their initial deposit, investments such as stocks present the highest potential for gains. Many of us just don’t have the stomach for that kind of risk and volatility, though.

If your risk tolerance is low, high-yield certificates of deposit are your best alternative, offering the highest interest rates of all types of government-insured investments. Even though these rates are currently on the low side, CD returns are still outpacing inflation in many cases. Here’s how the national average annual interest rates stack up for various types of investments, according to the FDIC:

  • Money market account: 0.08%
  • Jumbo money market account: 0.12%
  • Savings account: 0.06%
  • Checking account: 0.04%
  • 12-month CD: 0.21%
  • 12-month jumbo CD: 0.22%
  • 24-month CD: 0.35%
  • 24-month jumbo CD: 0.38%
  • 60-month CD: 0.79%
  • 60-month jumbo CD: 0.80%

These figures represent national averages for rough comparison purposes. You’ll be able to find individual products in all categories offering substantially higher interest.

What do all these figures mean to me?

At first glance, these interest rates seem disappointingly similar. However, you might be surprised at the difference your investment choice will make over time.

Suppose you start out with $20,000 and you deposit it all in a money market account at your local bank for the national average rate yield of 0.08%. Assuming you don’t add any additional funds, at the end of a year you’d have earned $16 in interest, bringing your total balance to $20,016. Wait another year and your total balance would only reach $20,032.

Even if you somehow forgot about your account for five years, by the end of that time your total balance would have only grown to $20,080. In other words, you’d have to wait about five years just to earn enough interest to pay for a fancy dinner date.

If that same $20,000 investment sat in a regular savings bank account paying the national average interest yield of 0.06%, the story is even sadder. You’d end up with a total balance $20,012 after a year and $20,060 after five years.

The picture begins to change as you explore CD earnings. For example, $20,000 invested in a 12-month CD at the national average interest yield of 0.21% would earn $42 in interest by the end of one year. Not much, but it amounts to more than three times what you’d earn if your money remained in an average savings account that year.

If you were willing to wait five years for your CD to mature, you’d really see a difference in your gains, with your balance at maturity totaling $20,803 at the national average 60-month CD yield of 0.79%. That’s over $700 more than if you’d left that money in an average bank savings account for the same period.

Today’s best deals

With a little homework you’ll soon discover that you don’t have to settle for national average returns. While individual bank offers vary, you’ll find some of your best deals with online banks, because they don’t carry the same overhead costs as traditional banks. Top 12-month CD offers currently range from about 1% to 1.35%. At 1.35%, your $20,000 investment would be worth $20,270 after 12 months.

For those willing to shop around, a five-year commitment brings even better rewards, with the best deals on high-yield CDs paying between 2.05% and 2.15%. At 2.15%, that $20,000 investment would be worth $22,244 when it matured at 60 months. That’s over $2,000 more than if you left your money sitting in an average savings account.

Protect your earnings

Experts recommend a laddering approach when investing in CDs. Laddering provides a balance between always having some cash ready for better investments and protecting your portfolio’s growth should interest rates fall. To find out about the best current deals on high-yield CDs, visit NerdWallet’s CD rate comparison tool.

This article was updated. It originally published June 5, 2014.

Woman with bank and money image via Shutterstock.