I Only Have $500 to Invest. Is Opening a CD Worth It?
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.
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 |
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 |
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 |
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.
Our Research Expert