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- CDs offer fixed interest rates, making it easier to calculate interest compared to other types of savings accounts.
- To calculate interest on a CD, you need to know the interest rate and compounding frequency.
- A CD calculator determines the interest earned when an account reaches maturity.
If you want to see how much interest you’ll get at the best CD rates, you can use a CD calculator to do the math for you.
We will explain how to calculate interest on a CD and the benefits of CDs in general.
Certificates of deposit, or CDs, usually pay compound interest. This means you will earn interest on top of interest.
The details section of our calculator breaks down your total balance. It tells you the total interest earned, how much money you contributed to the account (if applicable), and how much you originally deposited into the account.
Understanding CD calculators
Here’s the information you need to calculate the interest on a CD using our calculator:
- Initial investment: This is how much you plan to deposit in a CD.
- Length of investment: You can set the CD term length here. Our calculator only allows you to calculate interest on CDs that mature annually. Therefore, you cannot calculate a 3-month, 6-month, or 18-month CD. If you’re trying to calculate interest for one of these terms, you can use the compound interest formula, however. The compound interest formula is A=P (1+r/n)^(nt). In the formula, “A” means the total amount, “P” means the principal amount, “r” means the interest rate (as a decimal), “n” means how often the interest is compounded in a year. , and “t” is the number of years the money is deposited in an account. When you enter the information for “t”, be sure to convert the years to decimal. For example, 18 months becomes 1.5 years.
- Contribution: Unless you plan to open an add-on CD, you’ll set the contribution amount at $0 because CDs only allow you to make deposits when you open the account.
- Rate of return: You can enter the annual percentage yield (APY) and mark that it compounds annually, or enter the interest rate and mark the compounding frequency as it relates to the account. You can call customer support directly if you can’t find any rate information on the bank’s website.
- Amount of Compound: You can enter whether the CD interest is compounded daily, monthly, or annually. Our calculator does not allow you to calculate interest on CDs that compound interest quarterly.
Matt Kasper, CFP, AIF, and executive advisor at Modern Wealth Management, points out that an account with a higher frequency of compounding is better because you can grow your money more quickly.
“If the compound interest rate is earned, monthly or daily or quarterly, that will contribute to the value of that CD,” Kasper explained. “Daily compounding is traditionally better than monthly. Monthly is better than quarterly.”
Basics of CDs
A CD is a type of savings account. Below, we cover the common banking terminology used for CDs so you can understand how these accounts work:
- Minimum opening deposit: Banks set how much you need to open a CD. The minimum opening deposit for CDs is usually $1,000, but some banks require less or more.
- API: A CD’s APY is the annual rate of return. The APY factors in compound interest.
- Early withdrawal penalty: Instead of having a monthly service fee like other bank accounts, CDs have early withdrawal penalties. You only pay a penalty if you withdraw money from the CD before it matures. The penalty is usually some of the interest you earned on the account.
If you are interested in maximizing the return on CDs, you can create a CD ladder. This is a common strategy where you put your money in several CDs of different term lengths.
CD ladders protect you against interest rate fluctuations. For example, if CD rates start to fall, you will still have long-term certificates that will pay higher interest rates until they reach maturity. Conversely, if CD rates start to rise, you can take advantage of higher CD rates when your short-term accounts mature.
How CD calculators work
You can use a compound interest calculator to determine the interest you will earn on a CD. In most circumstances, you’ll want to use a compound interest calculator instead of a simple interest calculator because banks often compound CD interest.
If you fill out all the fields on a compound interest calculator, it will tell you your total balance. This is the amount of money you will have in your account when your CD is fully matured.
Calculating interest on CDs is easier than other types of savings accounts because the interest rate remains the same throughout the term. With savings or money market accounts, the interest rate can change at any time.
Example of a CD calculation
Let’s say you deposit $100,000 into a 2-year traditional CD. The account has a 5% interest rate and compound interest daily. If you enter this information into our certificate of deposit calculator, you will see that your total balance after two years is $110,250. Additionally, our details section states 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 they are insured by the FDIC. The FDIC is a government agency that regulates banks. It also protects up to $250,000 per depositor, per account category.
If a bank closes, the FDIC makes sure your insured deposits are returned to you. Your money will be transferred to a financial institution that will acquire the assets of the closed bank, or you will receive a check sent to your home.
Keep in mind that other investment options may provide 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 may lose money.
Tips for using CD calculators
If you are using a certificate of deposit calculator, make sure you enter all the correct information. Here are some tips to help you avoid mistakes with a CD interest calculator:
- Learn the difference between APY and interest rate. Since the APY tells you how much interest you will earn in a year and includes compound interest, you can mark the compound frequency as occurring annually. If you use the interest rate of the CD, you need to be more conscious of the frequency of compounding. The compound frequency can be daily, monthly, or yearly.
- In most circumstances, your additional contribution amount will be $0. You cannot make additional contributions to a CD unless it is an add-on CD. An add-on CD is a special type of account that allows you to make deposits during the term of the CD.
CD calculator FAQs
A $1,000 CD deposit earns $50 in interest a year if the account pays 5% APY. The total balance on the CD will be $1,050 at maturity.
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 in the interest rate (as a decimal), The “n” represents how often the interest is compared in a year, and “t” represents the years that the money is deposited in an account.
A CD can be a good investment option if you don’t want to take too much risk with your money. CDs are a type of bank account, so there is less risk involved. If a bank fails, up to $250,000 per depositor is safe per depositor, per account category.