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- CDs offer fixed interest rates, which make it easier to calculate interest compared to other types of savings accounts.
- To calculate interest on a CD, you'll need to know the annual percentage yield (APY).
- A CD calculator determines the interest earned when an account reaches maturity.
If you want to see how much interest you'll earn with the best CD rates, you can use a CD rate calculator to do the math for you.
We'll explain how to use a CD rate calculator. We also cover the basics of CDs in case you need a refresher on how it works.
CD rate calculator
Certificates of deposit, or CDs, generally pay compound interest. This means you'll earn interest on top of interest.
You can use the following CD rate calculator to determine your interest earnings and total savings balance at CD maturity.
Understanding CD rate calculators
Here's the information you'll need to calculate interest on a CD rate calculator:
- Initial deposit: This is how much money you plan to deposit into a CD.
- Monthly Contribution: Unless you plan to open an add-on CD, you'll put the contribution amount at $0. Most CDs only allow you to deposit money when you open the account, so you can't deposit money on a monthly basis.
- Annual percentage yield (APY): The APY tells you how much interest you'll get paid in an account over the course of a year. The APY isn't necessarily the same as the interest rate, because it factors in how frequently money is compounded.
- Over a period of: You can put in the CD term length here. If you're entering months instead of years, make sure to switch the tab to calculate the right amount.
Matt Kasper, CFP, AIF, and executive advisor at Modern Wealth Management, points out that an account with a higher compounding frequency is better because you'll grow your money more quickly.
"If that compound interest rate is received, monthly or daily or quarterly, that's going to contribute to the value of that CD," explains Kasper. "Daily compounding is going to perform traditionally better than monthly. Monthly is going to perform better than quarterly."
Basics of CDs
A CD is a type of savings account. Below, we cover common banking terminology used for CDs so you can understand how these accounts work:
- Minimum opening deposit: Banks specify how much you need to open a CD. The minimum opening deposit for CDs is generally $1,000, but some banks require less or more.
- APY: The APY of a CD is the annual rate of return. APY factors in compound interest.
- Early withdrawal penalty: Instead of having monthly service fees like other bank accounts, CDs have early withdrawal penalties. You'll only pay a penalty if you take out money from a CD before it has matured. The penalty is usually some of the interest you've earned on the account.
- CD term: CDs are opened for an exact timeframe, often referred to as a term. For example, if you get a 1-year term paying 5% APY, that means your account will earn 5% for one year.
- CD maturity date: The last day of your CD term is called the CD maturity date. Most banks automatically renew CDs. That said, banks also provide a grace period, which is a few days right after your maturity date. You can choose to take out all your money from your CD or move it into a different term.
If you're interested in maximizing returns on CDs, you could build a CD ladder. It's a common strategy that has you deposit your money into several CDs of different term lengths.
CD ladders can protect you against interest rate volatility. For example, if CD rates started dropping, you'd still have long-term certificates that would pay older interest rates until they reached maturity. Conversely, if CD rates started rising, you could take advantage of higher CD rates once your short-term accounts matured.
How CD rate calculators work
You can use a compound interest calculator to determine the interest you'll earn on a CD. In most circumstances, you'll want to use a compound interest calculator instead of a simple interest calculator because banks typically compound CD interest.
When you fill out all the fields of a compound interest calculator, it will tell you your total balance. This will be how much money you'll have in your account when your CD has fully matured.
Calculating interest on CDs is easier than with other types of savings accounts because the interest rate stays the same throughout the term. With savings or money market accounts, the interest rate could change at any moment.
Example of a CD rate calculation
Let's say you deposited $100,000 into a 2-year traditional CD. The account has a 5% interest rate and compounds interest daily. If you input this information into our certificate of deposit calculator, you'll see that your total balance after two years is $110,250. Furthermore, our details section notes that the interest earned after two years is $10,250.
Benefits of CD investment
CDs are a low-risk place to keep your savings because banks are insured by the FDIC. The FDIC is a government agency that oversees banks. It also protects up to $250,000 per depositor, per account category.
If a bank fails, the FDIC makes sure your insured deposits will be returned to you. Your money will be moved to a financial institution that acquires the closed bank's assets, or you'll get a check sent to your home.
Keep in mind that other investment options can offer higher returns compared to CDs. That said, you have to tolerate higher risk to get higher returns. Investment accounts are not FDIC-insured, and you could lose money.
Tips for using CD rate calculators
When you're using a certificate of deposit calculator, make sure you input all the correct information. Here are a few tips to help you avoid mistakes on a CD interest calculator:
- Know the difference between APY and interest rate. Since APY tells you how much interest you'll earn in a year and includes compound interest, you can mark that the compound frequency occurs annually. If you use the interest rate of CD, you'll need to be more mindful of the compounding frequency. The compound frequency could be daily, monthly, or annually.
- In most circumstances, your additional contribution amount will be $0. You can't make additional contributions to a CD unless it's an add-on CD. An add-on CD is a special type of account that allows you to make deposits during the CD term.
- When you make an early withdrawal, remember that the penalty will take some of the interest you've earned. When you're using a CD rate calculator you have to keep in mind that you're making the assumption that you're keeping your money in the account until it fully matures. If you make an early withdrawal, your total interest earned will be different. You'll only earn the interest for the time that your money remains in the account. Furthermore, you'll have to pay a penalty which will take away from your total earnings. The penalty for a CD varies by bank and depends on the term. Longer-term CDs tend to have higher early withdrawal penalties than short-term CDs.
Choosing the right CD
CD types with different features
The most common option you'll find is a traditional CD, but numerous banks also have specialty CDs. Here's an overview of the different types of CDs out there:
- Add-on CD: This type of CD allows you to make deposits after your CD is open. All other CD types only permit one deposit right when you open the account.
- Step-up CD: This is a type of variable-rate CD, which means that the APY on your account changes during the term. Banks offer a guaranteed increase on a specific date, although the rate change usually isn't significant.
- Bump-up CD: This is another type of variable-rate CD. However, rate changes are dependent on the economic environment. You can only request a rate increase if your bank raises rates on CDs before your account reaches maturity.
- No-penalty CD: This type of CD permits at least one withdrawal without charging a penalty.
- Jumbo CD: This type of CD may be beneficial for people who want to make a substantial opening deposit. Some banks will offer a higher interest rate for jumbo CDs than traditional CDs because of the amount you're keeping in it.
CD terms lengths and rate environment
The term you select and the current rate environment can also be important for CD selection.
Normally, short-term CDs pay lower interest rates than long-term CDs. However, the opposite is actually true right now because of economic uncertainty.
If you're deciding between short-term CDs and long-term CDs, keep in mind that there are advantages and drawbacks to both. Short-term CDs may pay better rates at the moment, but you'll need to keep track of economic conditions more frequently because the maturity dates approach more quickly. Furthermore, long-term CD rates allow you to earn a fixed interest rate for a longer period than short-term CDs. When CD rates decline, that may serve as an advantage.
The CD rate environment fluctuates over time based on individual bank criteria and external factors like economic conditions. The Federal Reserve's actions, in particular, can influence CD rate changes. CD rates may decline after the Fed cuts rates, and increase if the Fed raises rates.
To keep track of larger CD rate trends, you can keep up to date with the Federal Reserve meetings schedule.
Implementing a CD ladder strategy
You can also choose to open multiple CDs at the same time. This is called building a CD ladder. It's an effective way to hedge against interest rate volatility and get more account flexibility. However, you'll need to track of various CD maturity dates to avoid accidentally making an early withdrawal or renewing your CD at a significantly lower rate.
CD rate calculator FAQs
A $1,000 CD deposit makes $50 of interest in a year if the account pays 5% APY. The CD's total balance would be $1,050 at maturity.
A CD rate calculator uses basic information about a CD, like the APY, term length, and initial deposit, to tell you how much interest you'll earn and what your total account balance will be. CDs have a fixed interest rate and set timeframe, so as long you keep money in the account until maturity, you're guaranteed to get your total interest earnings.
CD interest can be calculated using the compound interest formula. The compound interest formula is A=P (1+r/n)^(nt), where "A" represents the total amount, "P" represents the principal amount, "r" represents the interest rate (as a decimal), "n" represents how frequently the interest is compounded in a year, and "t" represents the years the money is deposited in an account.
A CD may be a good investment option if you do not want to take significant risks with your money. CDs are a type of bank account, so there's little risk involved. If a bank fails, up to $250,000 per depositor is secure per depositor, per account category.
