Yahoo Finance Interest Rates Are High: If You Open a $10K CD Today, Here’s What You’d Earn in 10 Years
There are a lot of different ways to invest money for a decent return, ranging from low to high risk. For people who favor a low risk, stable way to grow interest, a certificate of deposit (CD) can be a safe and reliable option.
With a CD, you can pretty much forget about the investment until it’s time for that product to mature.
If you were to invest $10,000 today, what would you earn in 10 years? Before we answer that question, let’s look at the reasons why you would want to invest in a CD at all.
Here are the best CD rates for this month.
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The Advantages of a CD Over Other Investment Options
Safety and predictability are perhaps the best reasons to invest in a CD, according to Ant Tumi, finance expert and founder of Loan For Success.
“CDs represent a low-risk investment instrument, hence best suited for a conservative investor for whom preservation of principal remains at the top of his priority list,” Tumi said.
Unlike stocks or mutual funds, CDs are safe returns and they are insured by the FDIC up to $250,000 — per depositor, per insured bank — he said.
In a nutshell, you rarely have to worry about losing your money if you stick it in a CD.
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Interest Rate Assurance
Another great reason to invest in one is that once you lock in your rate, no matter what happens to interest rates, yours is guaranteed.
“This action helps to keep your returns both predictable and immune from market volatility,” Tumi said.
Financial Goal Alignment
Additionally, with CDs having fixed terms, this enables you to align your other financial goals — such as major purchases or saving for a child’s college fund — with the maturing of a CD.
“The fixed nature of CDs greatly helps in disciplined savings, with no temptation to withdraw the funds earlier than envisaged,” Tumi said.
Consider Laddering Your Funds
There’s a significant difference between the average rate and the best rate of return right now for CDs, according to Ben McLaughlin, personal finance expert and president of Raisin. As of June, the average for a 6 month CD is 2.51%, while other CDs can be as high as 5.4%, according to MarketWatch.
McLaughlin said that with a wide variation on rates, depending on the timeline and the product you invest in, “[i]n this environment, typically shorter term products have higher rates of return than longer term products.”
You may also want to “ladder” your funds and put some money in shorter products with higher returns and invest some in a longer term product with a slightly lower but also guaranteed rate, he said.
“Whatever term you decide to lock-in for, it’s so important to do your research and make sure that you’re getting the best rate possible and that you understand all of the fine print.”
Prioritize an Emergency Fund
A CD is a great choice for money you don’t need immediate access to, as long as you have a healthy emergency fund — ideally six months worth of expenses — in a high-yield savings account where you can get it if needed, McLaughlin said.
CDs are really useful for locking in great rates, especially as it is predicted that rates will cool in the fall, he said.
“The best amount of money to put into a CD is as unique as you are — it depends wholly on your personal situation. Whatever the amount, it should consist of funds that you don’t need in order to live, or help you out of an unexpected situation.”
How Much You Can Earn
If you invested $10,000 today and took out a 10-year CD (which is the limit to invest in a CD) at an average rate of 4% and with monthly compounding interest in mind, you’d earn between $4,500 and $4,900 in that 10 year period. While that might not seem like a whopping amount, consider all the other benefits mentioned above, such as security and stability, without any concerns that a market correction will wipe out your gains.
For the person who wants a safe and reliable way to earn interest and who doesn’t need access to those funds, a CD is a great option for you.
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This article originally appeared on GOBankingRates.com: Interest Rates Are High: If You Open a $10K CD Today, Here’s What You’d Earn in 10 Years
