How Much Should You Put Into a CD? Here's One Way to Decide

Certificate of deposit (CD) rates have risen over the past few years, making them an attractive option for people looking to grow their money. But figuring out how much to put into a CD and when it's the right time can be challenging. Here are a few things to keep in mind before you jump in.

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How much should you put into a CD?

The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time.

While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.

Once you have enough money saved for a minimum amount, the next step is to look at the current amount of cash in your bank account and your total investments to determine how much should go into a CD. For example, U.S. Bank says a general rule of thumb is for cash and cash equivalents (including CDs) to make up 2% to 10% of your portfolio.

Let's assume you have a total of $50,000 of investments and cash. In this scenario, you may want to put $2,500 -- 5% of your $50,000 -- into a CD. Keep in mind that you don't want to put all your cash into a CD.

What money should go into a CD?

A CD is a safe place to store some of your money so it can earn you more money. But it works differently than a high-yield savings account.

With a savings account, you can generally take out the money when you want to, without a penalty. Savings accounts give you more flexibility but typically earn a lower rate of return. But when you put your money in a CD, you're agreeing not to touch the cash for a set amount of time -- sometimes for up to 5 years -- while you earn a predetermined rate on the money you put into it.

In exchange for handing your money over for that time, you receive a higher interest rate.

What money shouldn't go into a CD?

A CD isn't the place to build an emergency fund, and it's not for retirement investing. Most financial experts recommend having at least $1,000 in an easily accessible emergency savings account. Ideally, you want to eventually build that amount up to three to six months' worth of your living expenses.

A CD isn't the place to keep this money because you won't be able to easily access it during an emergency. CDs often charge fees for withdrawing money, while savings accounts generally do not. If you need cash to fix your car or replace a broken appliance, you want easy access to your money and no penalties for withdrawing it.

Plus, a CD isn't the place for you to put your retirement money. A CD generally won't earn enough to build a retirement nest egg, so it's best to put that money into a brokerage account where you can buy stocks and index funds.

Dip your toe in first

Like any major financial decision, it's best to move slowly. It may be a good idea to put a small amount of money into a six-month CD to learn how it works, how you earn interest, and how you feel about having your cash temporarily committed to a CD.

And if you don't like having some of your money in CDs by the end of six months, at least you'll have earned some interest and learned something new along the way.