Want to Earn $1,000 a Year With CDs? Here's What It Takes

A wad of folded dollar bills
A wad of folded dollar bills

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If you love free money, then you may be really happy with where certificate of deposit (CD) rates are at right now. With many banks paying 5% or more, you have a prime opportunity to get paid a boatload of money in interest for taking on virtually no risk. All you have to do is open a CD at a bank that's FDIC-insured and limit your deposit to $250,000 or less.

In fact, thanks to today's CD rates, you may be in a position to earn a whopping $1,000 in interest in the course of just a year. However, it may take a pretty large sum of money to pull that off.

What it takes to earn $1,000 in interest with CDs

Right now, many banks are paying 5% or a little bit more on 12-month CDs. At Capital One, for example, 5% is the current going rate. So if you want to earn $1,000 in the next year, you'll need to deposit $20,000. And let's face it -- that's a large sum.

It may get even harder to earn $1,000 a year with CDs once rates start falling. And that could happen at some point later this year.

The good news is that once you open a CD, your rate is locked in, even if market conditions lead to falling interest rates after the fact. But if next year you can only find a 12-month CD paying 4%, it'll take a $25,000 deposit to earn $1,000 in interest over 12 months.

You may do a lot better outside of CDs

Earning $1,000 a year with CDs requires you to tie up a lot of cash in the bank. And earning that much money could get harder to do over time as rates fall. So if your goal is to snag $1,000 per year in passive income -- meaning, money you don't have to go out and earn -- then you may want to consider investing instead of relying on CDs.

CDs are great when you're putting money away for near-term goals. But over time, investing in the stock market could do much bigger things for your finances.

Over the past 50 years, the stock market's average annual return has been 10%. So if you invest $10,000 in stocks, you might earn $1,000 if your portfolio value increases 10% in the 12 months to follow.

Of course, investing is best done over a lengthy period of time. It's actually not a good idea to only invest for a 12-month period because you could see your portfolio value decline during such a short time.

But let's say you don't have $20,000 or $25,000 to put into CDs. Let's say you have just $5,000, but you put that money into stocks and leave it alone for 30 years. If your portfolio generates an average annual 10% return over that time, you could end up with around $87,000. That's a gain of $82,000. And when you divide that gain by 30, it's an average of $2,733 a year -- more than $1,000.

So while it's certainly possible to earn $1,000 a year with CDs, especially now, with interest rates being high, it takes a lot of money to do so. If you don't have as much money and you're trying to build up wealth over time, you may want to invest your cash instead.

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