If You Invest $1,000 in a CD Today, Here's How Much You Could Have in 5 Years

CD rates are the highest they've been in years, and for the first time in a while, more people are looking to CDs as a part of their investment strategy, not just as savings vehicles. And you might be surprised at how elevated CD yields combined with the power of compound investment returns could grow your money over time.

With that in mind, here's how much $1,000 could grow to in a 5-year CD right now, along with some alternative strategies to maximize your yield as well as financial flexibility.

How much would a 5-year CD grow?

First, we'll start with the easiest answer of how much you could get by simply putting your money into a 5-year CD and leaving it alone.

As of this writing (Feb. 4), the best APY on our top 5-year CDs list is 4.30%. The income you earn will depend on how much you put into the CD, but for the purposes of illustration, we'll use a hypothetical $1,000 CD deposit.

After the first year, the CD would grow by 4.30%, which would give you an ending balance of $1,043. In the second year, the $1,043 would grow by 4.30%, which would produce a balance of $1,087.85. In the third year, the 4.30% APY would be applied to this amount. Here's a look at the year-by-year growth of $1,000 in a 5-year CD, compounded at 4.30%.

So, if you were to put $1,000 into the highest-yielding 5-year CD on our top CDs list, you'd earn a total of $234.31 of interest over the five-year term. At the end of the term, you can either withdraw the balance of $1,234.31, or you could allow your CD to be renewed for another 5-year term at the then-current rate. (Note: Most CDs automatically renew unless you specifically tell the bank you plan to withdraw your money.)

Should you buy a 1-year CD instead?

If your goal is to maximize your income, it's important to point out that unlike at most times throughout modern history, shorter-term CDs are paying higher APYs than longer-term ones. Typically, it's the other way around -- that is, banks are willing to pay a premium if you're willing to leave your money on deposit for a longer period of time.

As of Feb. 4, 1-year CDs on our best-of list have APYs up to 5.50% -- significantly higher than the 5-year CDs on our radar.

The reason for this is that CD rates come from three primary factors -- the bank, the current interest rate environment (are the Federal Reserve's benchmark interest rates high or low?), and expectations for future interest rate movements. In other words, right now interest rates are at multi-year highs, but they aren't expected to stay that way for long, and you're seeing that reflected in the yields paid by 5-year CDs.

It might seem like a better idea to simply put your money into 1-year CDs for the time being to maximize yield, but there's one big problem. In a year, you'll need to renew the CD at the current rate, and there's no guarantee that you'll be able to get nearly as high of an APY that is available now. In fact, most experts predict that interest rates (and therefore CD yields) will be significantly lower a year from now.

A CD ladder can help you maximize current income and long-term flexibility

To be clear, if your goal is to lock in an APY to generate consistent income, a 5-year CD is probably the best move for you. On the other hand, if your primary goal is to maximize your current income, and/or not necessarily keep your money tied up for five years, a CD ladder could be right for you.

You can read a primer on CD ladders for more details, but the general idea is that a CD ladder involves dividing your money among CDs of different maturities. For example, instead of putting $10,000 into a 5-year CD, you'd put $2,000 into a 1-year CD, $2,000 into a 2-year CD, and so on.

By doing this, you'll increase your current income, since some of your money will be in CDs that pay higher short-term rates. Every year, some of your money will mature, which will give you the flexibility to use it if you need it. And if you don't, you can renew the maturing CDs into new 5-year products.

In a nutshell, a CD ladder combines the best of all three worlds -- high initial yield, long-term APY visibility, and financial flexibility. And it could be the best approach to incorporating CDs into your investment strategy.