Here's What Happens When You Put Too Much Money Into a CD

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CDs have been a popular choice for savers this year due to their impressive rates. For much of 2024, it was easy enough to lock in a CD at 5%.

At this point, it's harder to find 5% CDs. But CD rates are still pretty impressive, with many paying well over 4%. It's not too late to jump on the CD bandwagon if you didn't do so earlier in the year.

At the same time, you don't want to make the mistake of putting too much money into a CD. Going overboard could actually cause you to miss better returns elsewhere.

Be careful with CDs

A CD is a great place to grow your money on a short-term basis. If you're saving for a home and are aiming to buy one in 2027, now's a good time to open a 12- or even 24-month CD.

But you should limit the amount of money you put into a CD to funds you expect to need in a few years. If you expect to hang onto the money for many years or even decades, you should probably invest it instead.

While you might still get close to 5% out of a CD today, you should know that over the past 50 years, the S&P 500 has rewarded investors with an average annual return of 10%. That 10% accounts for years when the market soared, but also, years when it clocked in losses.

This tells us that if you invest in a broad market index like the S&P 500 over a long period, you could make a good amount of money. If you put too much money into a CD, you might limit your returns.

Investing long-term money can make a big difference

Let's say you're planning to put $40,000 down on a home you're planning to buy in 2027 because you're in grad school until that point. And you have $45,000 in savings right now on top of what you need for emergency fund purposes. You might assume it makes sense to put that entire sum into a CD. But you're better off limiting your CD to $40,000 and putting the remaining $5,000 into a stock portfolio.

If you earn a 10% yearly return on your $5,000, then in 25 years, it will be worth about $54,000. If you wait two years to invest your $5,000, it will only be worth about $45,000.

And yes, you'll earn something on that $5,000 if you put it into a 24-month CD. But at 4.5%, you're looking at $460. That doesn't make up for the $9,000 difference between investing your $5,000 now vs. in two years from now.

Don't go overboard

CDs are a good way to earn a little extra on your money in the near term. But when you put too much money into a CD, you limit the amount you can earn on your cash. Be careful when opening a CD today, because even though rates are still pretty high, they pale in comparison to the return you might get out of the stock market.

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