KEY POINTS
- You can find CDs with no deposit minimums and great rates.
- A 12-month CD with a $500 deposit would earn around $28.
- Sock drawers don't earn interest, and $28 is better than $0.
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There's this impression when it comes to finance that some products are only for people with a lot of money. I hear this about investment accounts a lot, and I've even heard it about certificates of deposit (CDs).
I'm here to tell you: Compound interest is for everyone, friends.
With $500 to deposit, you can definitely find a lot of great CDs with competitive rates. Sure, a few will have deposit minimums outside your range, but you still have plenty of options. Furthermore, any amount of money is a good amount to put to work -- even if it's "only" $500.
Even a small CD can generate income
One of the arguments I've heard from folks is that you won't make very much money, so what's the point? I'll admit, I do see some of the thought behind this perspective.
If you get a competitive rate, here's what a 6-month CD can return on a $500 investment:
| APY | 4.50% | 4.75% | 5% | 5.25% | 5.50% |
|---|---|---|---|---|---|
| End balance | $511.36 | $511.99 | $512.63 | $513.27 | $513.91 |
| Total interest | $11.36 | $11.99 | $12.63 | $13.27 | $13.91 |
Data source: Author's calculations
If you know you can do without that $500 for a full year, here's what a competitive 12-month CD would earn:
| APY | 4.50% | 4.75% | 5% | 5.25% | 5.50% |
|---|---|---|---|---|---|
| End balance | $522.97 | $524.27 | $525.58 | $526.89 | $528.20 |
| Total interest | $22.97 | $24.27 | $25.58 | $26.89 | $28.20 |
Data source: Author's calculations
So, yeah, I get it. You may not get very excited about $14 or even about $28.
But guess what? You didn't have to do jack for that money. It basically made itself. All you had to do was leave your $500 alone, and it paid you $14 to do nothing.
Sock drawers earn 0% APY
To put your options into perspective even more, answer this: How much money are you going to earn from that $500 if it's just sitting in your sock drawer?
Spoiler: Sock drawers don't earn interest.
Similarly, you don't want to leave that money in your checking account. The national average interest rate for a checking account is just 0.08% (and that's assuming your checking earns interest at all, which isn't the norm).
Your savings account might not be a great place for the money, either. The national average for those is just 0.46%. Here's what these numbers look like in terms of your return:
| APY | 0.08% | 0.46% | 1% | 1.50% | 2.00% |
|---|---|---|---|---|---|
| End balance | $500.40 | $502.30 | $505.02 | $507.55 | $510.09 |
| Total interest | $0.40 | $2.30 | $5.02 | $7.55 | $10.09 |
Data source: Author's calculations
If you weren't excited about $28 in a year, I bet you'd be really thrilled by that $0.40 you earn from your checking account!
Inflation eats all things
To be really honest, I'm actually being generous by saying your sock drawer's APY is 0%. In reality, inflation is eating away at your money so much that the sock drawer's APY is essentially negative.
In other words: Your $500 will actually be worth less than $500 after a year if you leave it in a sock drawer (or low-yield account). You need to at least keep up with the rate of inflation.
If you're not sold on opening a CD, consider a high-yield savings account instead. Right now, you can find competitive rates comparable to our favorite CDs, plus you can withdraw your money -- or deposit additional money -- whenever you want.
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Two of our top online savings account picks:
Rates as of May 19, 2024Ratings Methodology
| Advertisem*nt | |
| SoFi Checking and Savings | Barclays Online Savings |
| Member FDIC. | Member FDIC. |
Rating image, 4.50 out of 5 stars. 4.50/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. | Rating image, 4.00 out of 5 stars. 4.00/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. |
Open Account OnSoFi'sSecure Website. | Open Account OnBarclays'sSecure Website. |
Read Review | Read Review |
APY: up to 4.60% | APY: 4.35% |
Min. to earn APY: $0 | Min. to earn APY: $0 |
