A certificate of deposit, or CD, is a low-risk savings option for short- and long-term goals. Your funds will be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, and you’ll get interest paid out at the end of your term. You won’t have to worry about losing money due to stock market volatility or annual percentage yields changing after you lock in a rate.
But how much money should you put in a CD? Depositing too little might not be worth locking away, but depositing too much could mean some of the amount isn’t insured if there’s a bank failure.
There’s no golden rule to determine how much to put in a CD. But experts recommend a few factors to consider to reach your magic number. Here’s what to know:
How much should you put into a CD?
Like most banks and credit unions, CDs and share certificates (a credit union’s version of a CD) at FDIC- or NCUA-insured banks or credit unions protect your money up to $250,000 (including principal and accrued interest) per depositor, per account, said Billy Cho, Citi’s Savings Expert. “You can feel at ease knowing your money is safe and protected,” Cho said.
But with bank failures in the news this year, we don’t recommend risking an uninsured deposit.
Otherwise, your funds may not be protected and refunded if your bank were to close. If you plan to deposit a large sum of money, consider opening a joint CD account with a spouse (which protects your money up to $250,000 per account owner), investing the money elsewhere or opening CDs at multiple banks.
Read more: Are CDs Worth It?
What’s the minimum deposit for a CD?
Some banks don’t require a minimum deposit for a CD, whereas others have minimum deposits ranging from $500 to $1,000 or more. The required deposit also depends on the bank and CD type. For instance, some banks offer jumbo CDs, which often have steeper minimum deposit requirements -- sometimes at least $100,000 -- in exchange for higher APYs. Before opening an account, always compare deposit requirements to ensure you can meet the minimum amount.
More importantly, aside from the required amount, keep in mind that the vast majority of CDs allows only a one-time deposit, which means you won’t be able to contribute any additional funds throughout the CD term. The only exception is if you have an add-on CD, which lets you add more over time. But even if a minimum amount isn’t required, think about how much money you want to set aside to earn a certain return.
Should you put your emergency fund in a CD?
If you don’t already have an emergency fund, it’s important to try to set money aside each month to build up a safety net in case of a financial predicament. And it shouldn’t be put into a CD.
Depending on interest rates, storing your emergency fund in a CD may result in more interest earnings than a savings account. But it’ll cost you an early withdrawal penalty if you need to pull out your money before the CD’s maturity date, making it less than ideal for storing funds for unpredictable emergency expenses. If you have a suitable amount in your emergency savings and want to keep growing it, you could move a portion to a CD.
How much money you need for an emergency fund varies by person, but we recommend storing any savings for unexpected events in a high-yield savings account instead of a CD so that you can easily access your cash.
Read more: Where Should You Keep Your Emergency Fund?
Other factors to consider
Your savings goals
CDs are a good place to store savings for a specific expense, said Cory Moore, certified financial planner and founder of Moore Financial Planning. For example, you may be setting aside money for a down payment on a home or toward your kids’ college savings.
“I like CDs where we can back into a goal,” Moore said. “So if we know we have a certain payment due in six months, we can know exactly what we need to deposit in order to meet that goal down to the penny.”
For example, if you have money saved for a car or wedding fund, a CD with the right term can help you stash the money in a safe place so you’re not tempted to spend it.
The return you want to earn
And don’t forget about the interest you’ll earn. If you’re a little shy of a savings goal, you can also calculate how much interest you’ll earn before opening a CD to see if it will help you reach your target number.
Are CDs a good investment?
A few factors will help you decide whether a CD is a good place to stash cash for the future. Here’s how to decide:
APY: Always do the math to compare the varying returns across different CD terms and CD rates. Also see if there are other savings options with better returns, such as a high-yield savings account or an I Bond. Keep in mind that CDs have a fixed interest rate, while other savings or investment options may have variable APYs.
Time horizon: You can earn a guaranteed return with a CD, but make sure it’s the best choice based on when you’ll need the money. If you’ll require access to the money in a few months, you may want something with more liquidity instead of having your money locked for a time period. Essentially, a CD is a good way to earn a return as long as you won’t need the money for a set period of time.
Risk tolerance: CDs are FDIC- or NCUA-insured to protect your funds. However, you may earn a bigger return if you’re willing to take on more risk, for instance, if the stock market is performing well. The trade-off is that you may lose your principal and any interest if the market takes a downturn.
Other savings options to consider
If you need more flexibility with your finances, choose one of the options below to stock your savings. But remember that each option pros and cons to weigh.
CD ladder
Experts recommend CD ladders -- opening multiple CDs -- if you don’t want to tie your funds up in one CD or if you think you might get a higher return on your savings sometime down the road.
Here’s how it works: You’ll spread your deposit across several CDs with varying CD terms. If you have $5,000, each CD gets $1,000. You may open a six-month, one-year, 18-month, three- and five-year CD. When each CD matures, you may choose to roll the funds into a new CD at the current APY the bank offers. Or you may choose to spend the money or put it in a new savings account altogether.
Keep in mind that if you withdraw funds from these CDs before the term ends, you’ll have to pay an early withdrawal penalty but only for the CD you’re withdrawing from -- not from all the CDs that make up your CD ladder.
High-yield savings accounts
High-yield savings accounts are usually offered by online-only banks. Since they have fewer overhead costs than brick-and-mortar banks, online-only banks pass some of the savings down to customers in the form of higher savings rates. You’ll need to be comfortable with managing your money online instead of in person.
These accounts work like traditional savings accounts. You can make regular contributions, withdrawals and earn interest on your balance. Keep in mind that some high-yield savings accounts require a minimum balance to earn the highest interest rate, or you may only earn the highest APY for up to a certain amount.
Money market account
Money market accounts are a mix between high-yield savings and checking accounts. You’ll earn interest on your funds, but most money market accounts have a minimum balance or higher initial deposit requirement. APYs for this type of account are usually lower than high-yield savings accounts, plus the interest rates are variable, not fixed.
A money market account often comes with debit card and check-writing privileges, so it’s useful if you need to make purchases. The downside is that you may be limited to the number of withdrawals or transactions you can make per statement cycle.
The bottom line
How much you invest in a CD depends on several factors, including what your bank requires and your specific financial goals. Start by making sure you can meet a bank’s minimum deposit requirement. You can move the amount you’ve set aside for specific goals to help prevent you from spending those funds. Just make sure you don’t deplete your emergency savings -- you want that money easily accessible in case you need it in a pinch.
Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of CDs. Those points were all corrected. This version has been substantially updated by a staff writer.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.
