How Much Money Should You Invest in CDs?

Certificates of deposit (CDs) come with FDIC insurance, so there's essentially no risk to your money. And they tend to provide a higher interest rate than even a high-yield savings account

When you buy a CD, you'll agree to keep your money invested for a period of time in exchange for getting that higher interest payment. Unfortunately, if you take your money out early, you get hit with a penalty.

CDs are not a liquid investment, as you're tying up cash you can't easily take out. Plus, they typically don't provide the opportunity to earn the same generous returns you can get in the stock market. So you'll need to think carefully about what role (if any) they will play in your financial life.

Specifically, here's how you can decide how much money to put into a CD.

What is the minimum deposit required to invest?

Some CDs do not have minimum deposit requirements, but many do. For example, you may be required to deposit $1,000 or more to gain access to many CDs.

If you have a particular CD you want to invest in (perhaps because it offers a generous rate of return for a relatively short time commitment), you will need to invest enough to gain access to it based on its deposit minimum.

Making sure you fulfill the minimum requirement will help you decide exactly how much to invest.

What is your goal in buying a CD?

You should not put your emergency fund into a CD because you are going to need to be able to access that money if something goes wrong. You don't want to trap your emergency money and then get stuck deciding whether to incur the penalties that would come with early withdrawal or go into debt to cover the emergency costs.

If you are setting aside money for specific goals that have a long time horizon, such as saving for retirement, then you probably also don't want to put much of it into a CD. You can earn a better rate of return by investing in the stock market for the long term (especially if you buy something safe like an S&P 500 index fund). If you have a long investing timeline, you can minimize the risk of buying stocks. Even if you buy at a bad time and your share prices fall, the cyclical nature of the economy means they should eventually rise again.

If you have some mid-range goals you're saving for, you won't need the money for a few months or even a year or so, but you don't want to risk buying stocks and potentially having to leave your money tied up for a few years until a market recovery, then a CD may be a good place for it.

So, how much is right for you to invest?

By considering your goals for your money and how much you need to get your desired CD, you can decide how much money you should put into this type of asset. No matter what your decision, though, remember that if you want to avoid risk, you should make sure you keep your investment below the $250,000 FDIC insurance limit.

By considering these issues, you can decide what portion of your funds is best suited to a CD, so you can make the choice that's right for you.