With interest rates in the news every few weeks, and lately always on the decline, it can be hard to know just what to do with your money, or what will happen when you do make a decision about it. Although the rate that the Federal Reserve Board sets is not the same as the rate you’re going to be paid by an investment vehicle, it does influence rates of certificates of deposit (CDs) and even savings accounts.
When the federal funds rate goes down, eventually all kinds of other rates start to fall. So what happens if you put $5,000 in a 6-month CD today?
1. You’ll lock in your earnings for six months
When you buy a CD, it’s different from just putting money into a savings account. You actually lock in your interest rate for the period of the CD, whether that’s six months or 60 months. Right now, since rates are falling, it’s a good idea to lock in for as long as possible, but if six months is that number for you, then that’s still six months of high-interest CD earnings.
If you’re not sure that a certificate of deposit is a good fit right now, consider at least moving your savings to a high-yield savings account to reap a little bit more interest on your money, while keeping it available for use at any time. We keep a curated list of some of our favorite savings accounts — click here to check it out and see current rates.
Our Picks for the Best High-Yield Savings Accounts of 2024
|
American Express® High Yield Savings APY 4.00%
Rate info
Member FDIC.
|
APY 4.00%
Rate info |
Min. to earn $0 |
|
Capital One 360 Performance Savings 
APY 3.90%
Rate info
Member FDIC.
|
APY 3.90%
Rate info |
Min. to earn $0 |
|
Western Alliance Bank High-Yield Savings Premier 
APY 4.46%
Rate info Min. to earn $500 to open, $0.01 for max APY
Member FDIC.
|
APY 4.46%
Rate info |
Min. to earn $500 to open, $0.01 for max APY |
2. Your interest will be compounded monthly
Unlike some other types of investments, your interest is generally compounded monthly with a certificate of deposit. That means that every month, the bank will calculate how much interest your money has earned and add that back into your principal, so that the next month, you earn even more.
Here’s a quick example of how that works. Let’s say your $5,000 is earning the average 4.43% for CDs as of Nov. 18, 2024. In the first month, you’ll earn $18.46 in interest, which will be added to your balance, making your new investment $5,018.46. In the next month, you’ll earn $18.53, which will also be added to your balance, giving you $5,036.99 which you can earn interest from.
At the end of your six months, you’ll have earned about $111.77 in interest due to the compounding. That might not sound like a lot, but as your savings grows, the compounding effect gets increasingly dramatic.
|
CD Value |
Earned Interest |
Total Value |
|
|---|---|---|---|
|
Month 1 |
$5,000.00 |
$18.46 |
$5,018.46 |
|
Month 2 |
$5,018.46 |
$18.53 |
$5,036.99 |
|
Month 3 |
$5,036.99 |
$18.59 |
$5,055.58 |
|
Month 4 |
$5,055.58 |
$18.66 |
$5,074.24 |
|
Month 5 |
$5,074.24 |
$18.73 |
$5,092.97 |
|
Month 6 |
$5,092.97 |
$18.80 |
$5,111.77 |
Chart by author. Calculations by author.
3. You’ll have some time to consider your next move
Six months isn’t a long time to think, but if you just want to try out a CD and see what it’s like to have one, or if you’re considering a longer-term investment like a Treasury note, you’ll have some time to research and ponder. CDs can be very intimidating, since many come with stiff penalties for early withdrawal, so it’s smart to make sure you can really do without the money before going in on a much longer lock.
If you decide that a longer-term CD is right for you, check out the rates on our list of favorite CDs here. You can even get a 5-year CD with an APY in the mid-3% range now.
Choosing which CD to invest in
Contrary to popular belief, you can invest in any CD that you choose, even if it’s not offered by your regular bank. You do want to check all the terms and conditions of the CD before you take the plunge, just so you know what is expected of you and any penalties that you’ll want to avoid. But once you’ve done that, your CD will become a source of passive income for the next six months. Just set it and forget it — nothing could be easier.
