Growing your savings account balance can be a challenge if you’re new to the savings game, have had conflicting financial obligations, or have had a hard time making regular contributions to your savings account.
But the good news is there are ways to boost your savings by making tweaks to your savings strategy, like where you choose to park your money.
Certificates of deposit (CDs) are one option for growing your savings substantially and holding yourself accountable to your savings goals. Although these accounts work a bit differently than traditional savings accounts, savers stand to earn greater interest on their balances—especially in a high-inflation environment.
How a $10,000 deposit could grow over time
When you open a CD, you’re committing to making an initial deposit into your account and leaving that money in your account for the duration of your CD term. This term could be as short as one month, or as long as 10 years. Making a withdrawal from your CD before the end of your term will likely result in an early withdrawal penalty (usually a portion of or all of the interest earned on your balance). Not all CDs will charge a penalty, certain CDs like a no-penalty CD will not penalize you for an early withdrawal.
“CDs come with a wide range of possibilities and can open financial doors depending on your future goals and financial needs,” says Chris Moore, Director of Deposits and Payment Strategy at Alliant Credit Union. “We're seeing CD interest rates higher than in years past, so it's a great opportunity for consumers to diversify their financial portfolios while receiving financial payouts exceeding what typically come from savings accounts.”
Say you invest $10,000 in a one-year CD with an APY of 4.50%. This means that over the course of one year, you’d earn $450 in interest. And, with a larger initial investment, you could stand to earn even more:
Interest earned from a 1-year CD
Initial deposit
Interest earned after 1 year
$15,000
$675
$20,000
$900
$25,000
$1,125
$30,000
$1,350
$35,000
$1,575
$40,000
$1,800
$45,000
$2,025
$50,000
$2,250
How to decide between a CD and another savings vehicle
CDs can generate a significant amount of interest in a short amount of time, but it isn’t the only way to grow your savings. If access to your money is important, you might consider an alternative savings option like a:
High-yield savings account: A high-yield savings account works in the same way as a traditional savings account. It’s a deposit account at a credit union or bank that you can use for saving and earning interest on your money. The main difference between a high-yield savings account and a traditional savings account is that the high-yield savings account will offer a much higher yield—known as the annual percentage yield (APY)—on the money you keep in your account.
Money market account: A money market account is somewhat of a combination between a checking account and a savings account. These accounts typically offer higher APYs than most checking accounts, but may offer similar features like check writing, debit card access, and the ability to make withdrawals and deposits via ATM. Similar to a savings account, there may be a limit on the number of withdrawals that can be made from your money market account each month.
Choosing the right type of savings account will depend on what you’re saving for. If you’re saving for a specific goal with a defined timeline, putting your money in a CD could be one way to grow your savings and ensure that you aren’t tempted to dip into your savings before you need to.
However, if you’re on the hunt for a savings account with a bit more flexibility, a high-yield savings account or money market account could be worth considering.
“CDs are a great option for those looking to save money over a short or long period of time. However, individuals considering a CD for savings should first evaluate whether they can financially support themselves for the entirety of the CD term without access to the deposited money,” says Moore.
If you decide to put your savings in a CD, test-driving this strategy with a 1-year term could help you get a taste of what it’s like to lock up your money. And, if interest rates fluctuate, a 1-year term could work to your benefit. Rather than losing out on a higher APY if interest rates rise, a 1-year term means that you could rollover your CD into a higher-yield option after just one year.
The takeaway
Being intentional about where you’re putting your savings can translate to greater savings down the line if you select an account with a higher APY, lower fees, and a term that aligns with your savings needs and spending habits.
The national average APY for a one-year CD is 1.74 percent, based on Bankrate
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research, which shows this average has increased or remained the same since March 2022. If you deposited $10,000 into a one-year CD that pays this national average rate of 1.74 percent, in one year it would be worth a total of around $10,174.
There are a few different ways to invest your money to earn interest and live off of that income. The most popular investments are bonds, certificates of deposit (CDs) and annuities. The interest that you'll earn will depend on the amount of money you have in your account when you go to live off of that interest.
How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.
For example, let's say you invest $10,000 in a simple-interest account that earns 5%. You'll earn an estimated $500 in interest and your account will be worth $10,500 after a year.
If you invest $10,000 and make an 8% annual return, you'll have $100,627 after 30 years. By also investing $500 per month over that timeframe, your ending balance would be $780,326. Exchange-traded funds (ETFs) and mutual funds are both excellent investment options.
“With a nest egg of $100,000, that would only cover two years of expenses without considering any additional income sources like Social Security,” Ross explained. “So, while it's not impossible, it would likely require a very frugal lifestyle and additional income streams to be comfortable.”
The principal amount is Rs 10,000, the rate of interest is 10% and the number of years is six. You can calculate the simple interest as: A = 10,000 (1+0.1*6) = Rs 16,000. Interest = A – P = 16000 – 10000 = Rs 6,000.
CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.
A CD may allow you to earn more interest compared to a traditional savings account, depending on where you decide to open one. As long as you don't need the money in a CD before it matures, you could earn a decent amount of interest this way, especially when rates are climbing.
A one-year CD with a $10,000 opening deposit that earns the Bankrate partner average yield of 4.94 percent would be worth around $10,494 when it matures in 12 months' time. This high-yielding one-year CD would earn you around $320 more in total interest than a CD earning the national average rate.
For example, let's say you invest $10,000 in a simple-interest account that earns 5%. You'll earn an estimated $500 in interest and your account will be worth $10,500 after a year.
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
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