Investing $10,000 in a CD: How Much You Could Earn in a Year

In an environment where interest rates are high and rising, it can be hard to decide where to put your money — at a bank or credit union, or perhaps another financial institution — and in what type of account. Savings accounts, money market accounts, and CD investments give you a way to save money with little risk and competitive interest rates. If you have $10,000 and you want to put it somewhere better than in a cubby in your attic, CDs are an option you should consider. Just make sure you understand the numbers and the possible downsides. Below, we’ll show you how much you can make by investing in different types of CDs as well as some other savings alternatives.

If you look around, you will find a variety of interest rates being paid on certificates of deposit, or CDs. Some big banks offer a low-end interest rate on CDs that can be less than 1%, something like .03%. The national average for CDs (as of August 2023) is 1.59%. More competitive banks, such as online banks, brokerages, and some other commercial banks, will offer rates of upwards of 4% and even around the 5% mark.

As you can see, CD rates have been steadily rising since 2021.

Below you can see how much you would make by investing $10,000 in a CD for one year at various rates.

CDs come in a variety of time frames, with the most common being three months, six months, one year, two years, three years, or five years. Short-term CDs tend to have lower interest rates, so you won’t earn as much, but you will be able to access your money sooner. However, short-term CDs can sometimes offer higher interest rates if rates are expected to drop in the near future.

Many CD investors will opt to use a CD ladder strategy. With a CD ladder, an investor puts money in multiple CDs with different time frames. This prevents them from having all of their savings locked up for the same period of time. They can also take advantage of new CDs (like add-on CDs) or interest-rate-related investment opportunities if interest rates rise.

Long-term CD accounts will typically earn higher returns both from higher interest rates and longer time frames. However, note that — as mentioned above — this is not always the case. CDs behave similarly to savings accounts in that the interest is compounded. This means that the interest you earn in year one becomes part of the principal, and you can make money from that. With long-term CDs, some financial institutions will also offer bump-up CDs. These are CDs that allow you to bump up the interest rate at one point before the CD’s maturity date.

Your return also depends on the type of compounding the CD uses. Here are some of the ways interest can be compounded.

The majority of CDs use monthly compounding. This works by dividing the interest rate the CD offers monthly, as there are 12 months in a year. The monthly interest accrued is then applied to the account, thus increasing the CD balance on a monthly basis.

Daily compounding works similarly to monthly compounding, but now you divide the interest rate by 365 days rather than 12 months. Sometimes banks don’t use 365 days exactly, however, and instead use between 360-365 days.

Some CDs do offer compounding interest on an annual or quarterly basis. This is rare, however, so assume that most CDs will calculate interest daily or monthly.

Although banks can set whatever CD rates they desire, the main driver behind the rates is the base rate set by the Federal Reserve. When the Fed raises interest rates, a few things happen. One of the most consequential for CDs is that treasury yields become higher, and thus banks now have to compete with treasury bonds. These have virtually the same risk level as if you put your money in a bank; extremely low risk.

As long as the CD amount is below the $250,000, the FDIC limit, then the CD has essentially the same risk level as a treasury bond, as the United States government backs it up.

What do the pros say? Scott Sturgeon, a financial advisor at Oread Wealth, says that with rising interest rates, CDs are having a moment. “I think they can be a great tool for the right situation to take advantage of the relatively higher yields we’re experiencing while also doing so in a relatively low-risk way since CDs are subject to FDIC protections,” he says. “CDs can be a great fit for someone who has a set expense at some definite point in the future. For example, let’s say you have estimated tax payments to make throughout the year, and you’re currently sitting on a sizable amount of cash. You could ladder CDs for three, six, and nine months, and one-year increments to meet each of those payment amounts, while also getting a much higher yield on your dollars than you could even a year ago.”

The main disadvantage of CDs is that you are required to lock the money up for a set period of time, and possibly with a minimum deposit. This is why CD rates are often higher than savings account deposit rates; it’s a tradeoff. You lock the money up for a longer time period, and you receive a higher rate.

“If you need to access that money, you’re likely going to pay some kind of ‘penalty’ for doing so,” Sturgeon says. “If you need more liquidity, then a high-yield savings account or a money market mutual fund might be a better fit. But it really depends on the specifics of your financial picture.”

Here are some more ways to invest your $10,000.

When the Fed raises interest rates, capital from around the world flocks to treasury bonds. Treasury bonds are also some of the most liquid assets available. Be aware, however, that if the Fed continues to raise interest rates, it could affect the value of existing treasury holdings. This is because as new bonds are issued with higher interest rates, bonds lose value. However, if you are prepared to hold the bond until maturity, then the value of the bonds on the resale market does not matter as much.

Money market accounts are interest-bearing accounts at a financial institution, like a credit union or a bank, that pay interest. In most cases, the interest rate on a money market account will be greater than a savings account but less than a CD. When funds have capital they are not using but need available for deployment, they will often use money market accounts until the capital is ready to be injected. Money market accounts typically offer variable interest rates, and these will be influenced by several factors, including decisions by the Fed.

Like money market accounts and CDs, savings accounts are insured by the FDIC, making them extremely low risk. The advantage of savings accounts is they are liquid and straightforward to access. You can always shop around for a savings account with the highest interest rate.

The highest-paying 12-month CD will probably be from an alternative financial institution outside of the major banks, such as an online bank or credit union. At the time of this writing, the best rates on CDs hover around a 5% annual percentage yield.

Yes, if you are comfortable with the rate and locking up your money for six months. How much interest you are able to obtain when the CD matures will depend on where you buy the CD.

Most CDs will offer a fixed interest rate that compounds on a daily or monthly basis and they will credit the interest monthly.

CDs can vary in terms of rates, as mentioned above, whether you are dealing with a bank, credit union, or another financial institution. The national six-month average for a CD at the time of this writing is 0.93%. However, you may be able to find a CD with a 6-month maturity date that offers a higher APY.