How Much Money Should I Put Into a CD?

Quick Answer

CDs come in a range of terms, rates and deposit amounts. The amount of money you should put into a CD is a personal choice based on your situation. It depends on how much liquidity and savings you have, your goals, how much you can afford to set aside and how much insurance protection you’ll get.

A man preparing for CD deposit.

When you have money to set aside and grow, there are options beyond a regular savings account. One is a certificate of deposit (CD), which requires an upfront deposit you typically can't touch until maturity at the term's end. Taking out money early usually results in an early withdrawal penalty.

While CDs lack the flexibility of other accounts, they earn generous interest and are safer than stock investments. How much you keep in a CD should depend on your individual financial position and your goals for the money, though you should also keep in mind a CD's minimums and maximums. Here are a few things to consider when deciding how much money to put in a CD.

Factors to Consider to Decide How Much Money to Put in a CD

1. Your Financial Position

There are several types of CDs, but traditional ones 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 (they're often organized in tiers). Terms can range from a few months or a couple years; the longer the term, typically, the higher the APY.

A unique feature of CDs is you don't access the money until maturity; it's possible to withdraw sooner, but this usually means paying penalty fees. Given that CDs lack liquidity, consider how much money you can afford to temporarily lose access to. If you have an unexpected expense, you should have enough in your emergency fund or other deposit accounts to avoid dipping into your CD prematurely and pay fees and lose interest.

Why consider locking up your money in CDs at all? Their interest rates can be higher than savings accounts and returns are guaranteed. And because they're insured deposit accounts rather than investments, your money is safe.

It's important to understand that CDs grow existing savings through interest; you generally can't contribute more after your initial deposit. If you're starting with a small amount of savings you want to add to regularly, a savings account might be better. There's one in-between option: Some financial institutions offer add-on CDs, which do allow deposits after the account opening, but these aren't as common and may be hard to find.

When considering how much to put in a CD, weigh how much you can safely live without for the entire term. If you might need to withdraw any early, it might not be worth the penalty fees. You could explore no-penalty CDs, which don't charge fees for early withdrawals in exchange for a lower APY.

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2. Your Financial Goals

Another important factor as you weigh how much money to put in a CD is your financial goals and their timeframes. CDs come in a range of short- and long-term options, from a few months up to several years.

Longer terms earn higher interest rates, though don't go solely for the best APY. Think carefully about the ideal term length given your savings goals and what you plan to use the money for.

Say you've started saving for a vacation or a wedding later in the year, and you want to set your money aside and let it grow. You might prefer a short-term CD of six months to gain some interest but only lose access briefly. Or you could choose mid-range CDs for expenses a year or two out, like having a baby or renovating your home.

If you want to grow a nest egg for a house down payment but don't plan to buy for several years, you could get a CD for five or six years. It's a long time to have money locked away and inaccessible, but that requirement could help you avoid the temptation of using it elsewhere. You might have greater returns by investing, but CDs have far more security.

There's also a strategy called CD laddering for those seeking greater flexibility. This involves taking out multiple CDs with varying terms to stagger their maturity. This allows you regular access to your funds without sacrificing too much in higher yields.

3. 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 only choose a CD with a minimum amount your budget can afford. You can usually find reasonable minimums unless you go with a jumbo CD, which might have higher interest rates in exchange for hefty minimum balances, sometimes as much as $75,000 or $100,000.

If money is tight, you could 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. Just know that your interest earnings will be lower.

4. The CD's Federal Insurance Maximums

Since CDs are classified as deposit accounts, like checking or savings accounts, they're insured by the federal government. In the rare case that your bank or credit union goes under, federal insurance coverage kicks in from the Federal Deposit Insurance Corp. (FDIC) for banks or National Credit Union Administration (NCUA) for credit unions.

These ensure you get your money back should your financial institution fail, but with a caveat: FDIC and NCUA insurance has limits.

Both automatically cover $250,000 per customer, per account type, per bank or credit union. Say you have a checking account, savings account and CD in personal accounts with one bank; you would have $250,000 in protection total for all accounts combined. If your total balance at that bank or credit union exceeds that amount, you would only be covered for $250,000 of it.

The exception is accounts in different ownership categories. Joint accounts and individual accounts are considered separate ownership types, so you're insured for another $250,000 on accounts with the same bank or credit union if you own some of them jointly with someone else.

Why does this matter? A major perk of CDs is their reliability in returns and safety. If you open a large CD at a bank or credit union where you already have significant savings and checking balances, you might inadvertently exceed the insured limit. That leaves you vulnerable should the bank fail.

You can avert this risk by opening a CD at a different bank or credit union, or one where you keep less money, since you get up to $250,000 of insurance at each financial institution. Alternatively, 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 simply 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 quite as high as CDs, yields are better than for traditional savings accounts, and every little bit adds up.