Certificate of Deposit (CD) Calculator
A Certificate of Deposit (CD) is one of the safest investment vehicles available, offering a guaranteed return over a fixed period. Unlike a standard savings account, a CD locks your money for a specific term—ranging from a few months to several years—in exchange for a higher interest rate.
Use our free CD Calculator above to determine exactly how much your investment will grow. By inputting your initial deposit, interest rate, and term length, you can instantly see your total balance at maturity and the total interest earned.
How to Use This CD Calculator
Calculating your potential earnings is simple. Here is a breakdown of the inputs required:
- Initial Deposit Amount: The lump sum of money you plan to invest in the CD.
- Annual Interest Rate: The advertised rate provided by the bank or credit union. This is often quoted as an Annual Percentage Yield (APY).
- Term Length: The duration of time you agree to leave your money in the account. Common terms are 6 months, 1 year, 3 years, or 5 years.
- Compounding Frequency: How often the bank pays interest on your principal. The more frequently interest is compounded (e.g., daily vs. annually), the more money you earn.
Understanding CD Interest Calculations
The magic of a Certificate of Deposit lies in compound interest. While simple interest only calculates earnings on your principal investment, compound interest earns money on both your principal and the interest you have already accumulated.
The Formula
Most banks use the following compound interest formula to determine your final balance:
A = P (1 + r/n)nt
- A: The future value of the investment/loan, including interest.
- P: The principal investment amount (the initial deposit).
- r: The annual interest rate (decimal).
- n: The number of times that interest is compounded per unit t.
- t: The time the money is invested for, in years.
For example, if you invest $10,000 at a 5% interest rate compounded monthly for 5 years, your money grows faster than if it were compounded annually because the interest is added to your balance 12 times a year rather than just once.
Strategies to Maximize CD Returns
CD Laddering
One downside of CDs is liquidity; if you withdraw funds before the maturity date, you typically face an early withdrawal penalty. To mitigate this, savvy investors use a strategy called CD Laddering.
Instead of investing all your capital into a single 5-year CD, you split the money into five separate CDs with maturity dates of 1, 2, 3, 4, and 5 years. As each CD matures, you reinvest the cash into a new 5-year CD. This ensures that a portion of your money becomes available (liquid) every single year while still taking advantage of the higher long-term rates.
Shop for the Best Rates
Interest rates vary significantly between institutions. Online banks often offer higher rates than traditional brick-and-mortar banks because they have lower overhead costs. Always compare the APY (Annual Percentage Yield) rather than just the interest rate, as the APY accounts for the effect of compounding.
Frequently Asked Questions
What happens when my CD matures?
When your CD reaches its maturity date, you usually have a grace period (often 7 to 10 days) to decide what to do. You can withdraw the funds penalty-free, add more funds, or renew the CD for another term. If you do nothing, many banks will automatically renew the CD for the same term at the current interest rate.
Are CDs taxable?
Yes, the interest you earn on a CD is considered taxable income by the IRS. Even if you reinvest the interest and do not withdraw it, you must report the earnings in the year they were credited to your account. Your bank will typically send you a Form 1099-INT if you earned more than $10 in interest.
Is my money safe in a CD?
Yes. In the United States, CDs purchased at FDIC-insured banks are insured up to $250,000 per depositor, per insured bank, for each account ownership category. Similarly, CDs at credit unions are insured by the NCUA.