One of the best things about a certificate of deposit (CD) is that you know exactly how much money you’ll earn. CDs are generally for a fixed term at a set annual percentage yield (APY), meaning the earnings are a simple matter of mathematics.
The big variable is the APY. The interest earned on a $10,000 CD will vary depending on that APY, which is often dictated by the term length and current market conditions. You can also lose out on earnings by withdrawing your money early.
We’ll walk you through how to do the calculation and what to consider before opening an account.
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Earnings on a $10,000 One-Year CD Based on Current Rates
Let’s examine the potential earnings on a $10,000 one-year CD based on current rates. The information presented in the table below has been calculated to provide a comparison between the earnings from a national average rate, sourced from Curinos data, and more competitive rates drawn from our best CD rate picks.
| Type of 1-year CD | APY | Interest earned on $10,000 after 1 year |
|---|---|---|
| Best CDs | 4.50% to 5.05% | $450 to $505 |
| Top CD Rate Today | 5.92% | $609.82 |
| Average CDs | 2.61% | $264.14 |
*Data provided accurate as of August 10, 2024.
YOUR ENDING BALANCE
$1,025
How CD Interest Works
A CD account is a time-bound deposit held at a bank, financial institution or brokerage and has the following characteristics:
- Fixed time period: The locked-in term can range from a few months to several years, during which you agree to not withdraw the funds. If you do, you’ll pay a penalty – generally equivalent to a sizable portion of the interest earned.
- Fixed interest rate: A CD earns a fixed rate of interest over a specified period, so regardless of fluctuations in the market, the rate you’re promised remains unchanged.
- Compounding interest: Most CDs earn compound interest, meaning the interest you earn will itself earn interest. Compounding can occur daily, monthly, quarterly or annually, with more frequent compounding meaning more earnings for you.
While those features generally are the same no matter where you go, CD rates can vary considerably between institutions.
>> Related: Learn more about the types of interest
Factors That Impact Earnings
Determining how much you earn on your CD involves several key factors. Understanding these essential concepts will empower you to make the right decisions to reach your financial goals.
CD Term
The CD term refers to the length of time you agree to lock away your initial deposit. Opting for a longer-term CD often means sacrificing immediate access to your money and potentially facing penalties for early withdrawal. It’s important to carefully consider your financial goals and liquidity needs when you’re selecting a term for your deposit account.
In the past, opting for a longer term typically offered a higher interest rate and the potential for greater returns over time. However, recent market conditions have caused many financial institutions to offer higher interest rates on some of their shorter-term CDs. When comparing CD terms, it’s important to pay special attention to the rates offered on each term.
Interest Rate and APY
The interest rate is influenced by factors like the Federal Reserve’s policies, economic conditions and the competitiveness of the financial market. Keep an eye on the market and try to lock in a favorable rate.
The annual percentage yield (APY) represents the total amount of interest earned on an account over a year, accounting for compounding. This means that the APY reflects not only the stated interest rate but also how often the interest is compounded. A higher APY translates to higher overall earnings on your CD investment.
Compounding Frequency
Compounding frequency refers to the process of earning interest on both the initial principal and the accumulated interest, thereby magnifying the growth of your investment over time.
The frequency at which interest is compounded significantly influences the overall returns on your CD. Generally, more frequent compounding leads to greater returns over time because the interest is reinvested more often, which allows your investment to grow at an accelerated pace.
Compounding Interest
Consider two $10,000 CDs that are locked in for five years. Both offer a 5% annual interest rate but differ in their compounding frequency: One compounds interest daily, while the other compounds annually.
- Interest compounded annually: $12,762.82
- Interest compounded daily: $12,840.03
After five years, you will have earned over $77 more in interest if the interest is compounded daily. This is because the interest earned each day is added to the principal amount, and the next day’s interest is calculated on this new total. Therefore, when selecting a CD, it’s important to consider not only the interest rate but also the compounding frequency to maximize your earnings potential.
Penalties for Early Withdrawal
Withdrawing funds before the CD’s maturity date can result in significant penalties and fees. The severity of these penalties varies depending on the bank and the specific terms of the CD agreement.
Federal law sets a minimum penalty of seven days’ worth of interest for early withdrawal from a CD, although there is no maximum penalty. Banks typically charge a fee starting at 60 days’ interest on one-year CDs, with larger penalties for longer-term CDs. To ensure you fully understand the potential penalties for early withdrawal, carefully review the terms and conditions of any CD before committing funds.
>> Related: Learn more about the best CD rates
Alternatives to One-Year CDs
While one-year CDs are a solid and straightforward choice for boosting your savings, they’re not the only option. The best choice for you depends on your unique financial needs and preferences. Let’s explore two popular alternatives: high-yield savings accounts and money market accounts.
High Yield Savings vs. One-Year CDs
Both high-yield savings accounts and one-year CDs offer distinct advantages and drawbacks depending on your financial needs and priorities.
High Yield Savings Account
- Lower interest rates: Interest rates are typically lower than one-year CDs.
- More flexibility: You can deposit and withdraw funds anytime without penalty.
One-Year CDs
- Higher interest rates: The higher fixed rate guarantees your earnings and helps maximize returns over the term.
- Limited accessibility: Early withdrawal penalties apply if you access your funds before the CD matures.
The best choice depends on your circumstances and financial goals. Consider your liquidity needs, risk tolerance and desired return on investment when making your decision.
Money Market Accounts vs. One-Year CDs
Money market accounts and one-year CDs both allow for saving and earning interest, but they have differences in terms of liquidity and interest rates.
Money Market Accounts
- Lower interest rates: Money market accounts typically offer lower interest compared to one-year CDs.
- More flexibility: You can access your funds without incurring penalties.
- Easier access to funds: Money market accounts often come with check-writing privileges and ATM access. Some money market accounts even offer debit cards and online bill payment options.
One-Year CDs
- Higher interest rates: One-year CDs offer higher interest rates than money market accounts.
- Less access to funds: You must lock your funds away for a specified term.
- Early withdrawal penalties: You will need to pay early withdrawal penalties if you take your money out early.
Be sure to carefully consider your financial goals and liquidity needs so that you can choose the option that best suits your circumstances and helps you achieve your long-term savings objectives.
>> Related: Learn more about money market accounts vs. savings accounts
Earnings on a $10,000 CD Over Different Terms
Investing in a CD offers a predictable and secure way to grow your savings, making it an attractive option for individuals with specific, time-based financial goals.
The following breakdown assesses the relationship between term length and APY and how they contribute to overall earnings. The APYs listed below are based on national average rates, as reported by Curinos.
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|---|---|
| 3 months | 1.59% | $39.80 |
| 6 months | 2.52% | $126.66 |
| 1 year | 2.61% | $264.14 |
| 18 months | 2.22% | $338.29 |
| 2 years | 2.09% | $426.48 |
| 3 years | 1.94% | $598.77 |
| 5 years | 1.92% | $1,006.75 |
*Data provided accurate as of August 10, 2024.
You may opt for longer-term CDs spanning five years or more to save for a major purchase, fund your retirement or secure stable returns over an extended period.
However, it’s essential to carefully consider the trade-offs involved in committing to a longer term. While some longer-term CDs offer higher earnings than shorter terms, they also mean less liquidity and limited access to your funds until the CD matures.
>> Related: Learn more about the types of CDs
The Bottom Line: Making Informed Financial Decisions
By comparing potential earnings on a $10,000 one-year CD based on current rates, you can see the importance of seeking out competitive rates to maximize returns. The choice between average and top-tier CDs can lead to significant differences in earnings over time.
However, investing in CDs isn’t just about chasing the highest rate. It’s equally essential to align your investment strategy with your financial goals and liquidity needs. When considering a CD investment, it’s important to evaluate a range of options and carefully review the terms and features of each investment opportunity.
FAQs About Saving $10,000 In a One-Year CD
What CD term yields the highest return?
It depends. While CDs with longer terms have generally yielded the highest returns in the past, current market conditions show a trend of short-term CDs offering higher interest rates. It’s important to compare rates at specific institutions to determine which CD term yields the highest return.
Can you lose interest if you withdraw from a CD early?
Yes, most CDs have penalties for early withdrawal. The penalty is typically a percentage of your earned interest, which can significantly reduce your overall return. It’s usually expressed in days of interest, with 60 days’ worth of interest being a common penalty. Therefore, it’s essential to carefully review the CD’s terms and conditions before investing so you fully understand the potential consequences.
How much interest is earned on a five-year $10,000 CD?
The exact amount depends on the interest rate offered by a specific institution. Assuming a current average five-year CD rate of 1.92%, you would earn approximately $1,006.75 in interest over five years. However, it’s important to remember that rates can vary. It’s crucial to compare current offers and choose a CD that aligns with your needs.
