How much should you keep in a certificate of deposit?

Wondering how much to keep in a certificate of deposit? CDs can be a smart way to earn guaranteed interest on your savings. But they come with a catch: You can only deposit money once — when you open the account. And you'll need to keep your money in the CD until the term expires to earn the full advertised interest rate.

Because of these drawbacks, it’s best not to oversave in a CD. They also shouldn’t be the bulk of your retirement strategy, because even the highest CD rates may not keep pace with inflation over time.

So, how much should you keep in a CD? Whether you're saving for retirement or a specific short-term goal — like a home renovation or down payment — here are guidelines to help you find the right balance.

Benefits of a certificate of deposit

People usually put money into a CD because they want to take advantage of these benefits:

• Guaranteed returns. It’s easy to calculate how much you’ll earn with a CD because you lock in a fixed interest rate for the term of the deposit. This predictability can be especially helpful when saving for short-term goals or when you want to ensure a specific return on a portion of your savings.

• Safe and insured. CDs are considered one of the safest investment vehicles. Unlike stocks or bonds, which can fluctuate in value based on market conditions, CDs are federally insured so you get your money back no matter what — even if the bank fails. CDs are insured by either the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per depositor, per institution.

• Higher interest rates. CDs often offer higher interest rates than traditional savings accounts because you’re agreeing to leave your money untouched for a set period.

Dig deeper: How do CDs work? 7 types for boosting your savings

The dangers of overinvesting in a CD

Despite these benefits, there are several risks that come with dumping too much money into a CD at once.

You may not have access to your emergency fund

One of the primary dangers of overinvesting in CDs is that you may not have enough easily accessible cash in case of an emergency.

Financial experts recommend keeping three to six months' worth of living expenses in a high-yield savings account, which you can withdraw from any time you need.

If you lock up too much money in CDs, you may face early withdrawal penalties and be unable to cover unexpected expenses.

You miss opportunities for long-term growth

Another risk of keeping too much in a CD is that you may miss out on the potential growth you experience with other long-term investments.

For instance, some experts say no more than 2% to 10% of your retirement portfolio should be in cash holdings (like CDs). So if you have $500,000 saved for retirement, that’s no more than $50,000 in a CD.

The rest should be in a diversified portfolio that includes stocks and bonds. These investments have historically provided higher average returns than CDs, which are needed to build long-term wealth.

For instance, the S&P 500 has had an average annual return of 9.8% over the past 20 years with dividends reinvested. The average national CD rate is 1.86% for a one-year term. Even with some high-yield CDs earning 5% or more, it doesn’t come close to what you could earn over the long-term in an index fund.

CD interest rates may not keep pace with inflation

This leads into the next point: While CDs offer a guaranteed rate of return, they may not always keep up with inflation. If the interest rate on your CD is lower than the inflation rate, the purchasing power of your money will decrease over time — even if you technically have more money.

For instance, if you put $50,000 into a 10-year CD that earns 2%, your balance will be $60,949.72 after your term expires. On the surface, you’ve made over $10,000. That’s great! But if inflation is 2.5%, the purchasing power of your money will be $47,613 after inflation — less than when you started.

That’s another reason why investing for long-term goals is so important: It’s one of the only ways to outpace inflation.

Dig deeper: When is it worth it to break a CD? An expert's take on early withdrawals and breaking even

How much is too much to save in a CD?

First and foremost, you never want to deplete your savings account to fund a CD. You always want cash on hand to cover emergencies and other unexpected expenses.

Beyond this, make sure you don’t exceed federal insurance limits when deciding how much to keep in a CD. For the most part, these limits are $250,000 per bank per depositor.

If you want to invest more than $250,000, break it up between several banks or look for a financial situation that participates in the IntraFi network. This program gives you multiple million dollars of FDIC insurance coverage without having to go to separate banks.

Dig deeper: 6 best ways to FDIC-insure your excess deposits

Should I put my retirement money into CDs?

Whether to lock up your retirement funds — and how much to save — in a CD generally comes down to how soon you plan to retire.

• If you're far from retirement, CDs probably shouldn't be your main investment. You'll likely earn stronger returns by investing in stocks or other growth-oriented assets. But as you get closer to retirement, CDs can help protect the wealth you've built.

• If you’re within 10 years of retirement, a good rule of thumb is to limit your CD investments to the cash portion of your overall portfolio. So if your goal is to keep 2% to 10% of your retirement savings in cash, that amount could be the maximum you invest in a CD.

Talk to a financial advisor or retirement specialist to figure out what percentage of your portfolio should be in cash based on your age, time horizon and risk tolerance.

What to look for in a certificate of deposit

As you shop around for a CD, you’ll want to pay attention to six main factors:

• Minimum opening deposit. Many CDs require at least $1,000 to open, but jumbo CDs can require $100,000. Some online banks let you open a CD with any amount — even $1. Make sure you have enough money to meet the minimum requirement for the CD you want.

• Annual percentage yield (APY). The higher the APY, the more interest you’ll earn on your CD. You may also want to note how often the APY compounds — daily, monthly or quarterly. Check the CD’s fine print or call to ask. The more often it compounds, the better.

• CD type. Consider an IRA CD if you’re saving for retirement and want the same tax advantages as a traditional or Roth IRA. Or, consider a no-penalty CD if you think you may need to access your money early.

• Term length. CD terms can range from a few months to a decade or longer. Think hard about how soon you’d like to access your money, and look for a CD with a term to match.

• Early withdrawal penalties. CDs usually have early withdrawal penalties if you take your money out before the term ends. Understand these penalties and your breakeven point before opening an account.

• Automatic renewal. Many CDs automatically renew at the end of the term. If you don't want your CD to renew, set up a reminder to notify your bank before the renewal date.

Dig deeper: What is a jumbo CD? (Spoiler: Bigger isn't always better)

???? Where to find how often your CD compounds

Check your certificate of deposit’s fine print to learn how often the CD compounds. Most banks make it easy to find online — for instance, Ally Bank features daily compounding prominently within its advertising. If you can’t easily find this compounding information, call the bank’s support line and ask

How to maximize CD returns without taking on too much risk

CDs are generally a safe place to keep money, but they often work best as part of a broader savings strategy. Use these tips to maximize your returns while minimizing risks:

• Keep CD balances below $250K. FDIC and NCUA insurance covers up to $250,000 per depositor per institution. If your CDs exceed this amount, consider spreading your money across multiple banks or credit unions.

• Build a CD ladder into your strategy. CD laddering is where you divide your money across CDs with different term lengths so they expire — and pay out — on a rolling basis. As each term comes due, you can decide if you want to renew the CD or invest it somewhere else.

• Consider brokered CDs. Did you know you can buy CDs inside your retirement or investment account? If you don’t want to open one through a bank, you can invest in a brokered CD similar to how you’d buy a stock. Most can be bought in $1,000 increments.

• Diversify, diversify, diversify. If you're saving for a long-term goal that’s at least a decade away — like retirement or a child’s future education — investing may be a better way to grow your wealth than stashing money in a CD alone. Talk with a financial professional if you need help figuring out how much to keep in a CD.

Learn more: How much should you keep in a high-yield savings account?

Sources

• National Rates and Rate Caps, FDIC. Accessed July 15, 2024.

About the writer

Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes Advisor, MarketWatch, CNN Underscored, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she's committed to empowering people to stand up and take charge of their financial futures.