Quickly calculate how fast your money grows

Using a certificate of deposit (CD) calculator is an efficient way to determine how much interest you can earn by opening up a CD. It’s helpful when comparing CD rates and determining which account is the best fit for you. As long as you’re willing to lock in your money for a predetermined period of time, a CD could help you earn more than what you could in a high-yield savings account. Let’s dig into how a CD calculator works.

There are three key pieces of information on order to calculate the interest on a CD, 

• Interest rate: This will be the APY, or annual percentage rate you’ll get for the CD.
• Initial deposit: The amount you intend on depositing in the CD.
• CD term: How long your deposit will be held in the CD. 

Once you have the above information, you can plug these three numbers into the CD calculator to arrive at your total balance (principal and interest) by the end of your term. You can also see specifically how much interest you will earn. 

For example, let’s imagine that you want to see how much interest you can earn on a $5,000 deposit. You find two CDs—one earns a 4% APY for a 12-month period, while the other earns a 3.15% for the same term. Plugging it into the calculator, the first CD can earn you $200 in interest, netting you a $5,200 balance by the time your CD matures. The other CD will earn you $157.50 in interest, which is a $42.50 difference. 

It’s important to note that the estimates you see from the CD calculator assume that you will keep your deposit in the CD for the entire term. If you make a withdrawal before the maturity date, you will most likely forfeit the interest you earned and could face early withdrawal penalties. 

You can also use a calculator to look at different terms and CD rates to see whether it’s worth it to open a CD for a longer period of time. Keep in mind though, that longer terms don’t always guarantee a higher interest rate.

Compound interest is where you earn interest both on the principal and any subsequent interest you earn. Let’s say you have a $2,000 CD earning a 5% APY for two years that compounds semi-annually. After six months, your balance will be $2,100 — $2,000 principal plus $100 in interest. By the end of the year, your balance will grow to $2,205 since the interest you’ll earn is based on the $2,100 balance. 

The more frequently the interest compounds, the more interest you can earn. For example, if you have a CD that compounds once a year, it generally won’t earn as much interest as one that compounds interest monthly. 

The amount of interest you will earn on a five-year CD will depend on the APY you receive. In general, the higher your interest rate, the more interest you can earn. 

For example, if you deposit $500 in a five-year CD that earns a 5.15% APY, your balance by the end of five years will be $642.71, earning you $142.71 in interest. However, if the interest rate is 3.25%, your earnings will only be $586.71, a difference of $56 in interest earnings.

There are several factors to take into consideration when choosing a CD that best fits your financial situation. Some of these include:

• Interest: How much you earn is one of the top factors when choosing CD because you want to maximize the amount of money you can earn. The APY you receive is most likely compounded interest, so the higher the rate, the more you can earn. Consider shopping around for higher CD rates since not all financial institutions have the same offerings.
• Term: You need to be sure you can afford to have the amount you want in your CD to be locked up for the agreed upon term before opening an account. The longer the term, the more you could be risking losing out on CD rates that may go up. Consider your lifestyle and cash flow needs to determine what CD term is best suited for your situation.
• Deposit amount: Remember, you need to agree to keep the deposit you make until the end of the term to earn the full amount of interest. Make sure you can meet the financial institution’s minimum requirements and the amount is one you can commit to and afford. For instance, Jumbo CDs may earn you a higher interest rate, but you will most likely need to make a much larger deposit.
• Compounding frequency: There are different compounding frequencies offered by various financial institutions, whether it’s daily, monthly, quarterly, semi-annually, or annually. The more frequently interest compounds, the more you can earn. 

CDs can be a great investment if you’re looking for a guaranteed rate of return and have low risk tolerance. Since these types of accounts can often earn more than high-yield savings accounts, they can help you earn more as long as you’re willing to keep your money locked in the CD for a certain amount of time. For this reason, it’s usually best for those who are looking to maximize their short term savings, such as those who want to set aside money for a down payment for a home. Or, it could be a great fit for those who have enough to make another type of large purchase, like a car, but don’t actually need to access that cash for the next several months or years. 

However, if you’re looking for higher returns and want to invest for a longer time horizon, then a CD may not be your best option. Instead, there are other choices such as stocks, bonds, and even exchange traded funds (ETFs) in which you can invest through a reputable brokerage. Still, CDs can be worth it if you want to diversify your portfolio in order to lower some of the risk you may face with more volatile types of investments. Before making a choice, it is generally a good idea to seek the help of an experienced financial professional who has worked with clients that are in a similar situation as you are. 

The best CD rates today can be as high as 5% if you are willing to do your research and shop around. The national average for a 1-year CD is 1.75% APY and 1.23% for a 5-year CD, as of June 2023.

CD and savings account rates have been on the rise in recent months. But are CD rates still going up in 2023? The Federal Reserve chose not to increase interest rates during its June meeting, but many economists believe the Fed will raise rates at least one more time during 2023. Which means that CD rates may not have hit their peak quite yet.

CDs typically offer higher interest rates than savings accounts, but they’re a commitment: You must leave your money in place until the CD matures (usually anywhere from three months to five years) or you’ll have to pay an early withdrawal penalty. 

A CD ladder allows you to take the same lump sum of money that you might normally put into a single, longer-term CD (up to five years) and spread it out among multiple CDs with different terms. This arrangement allows you to take advantage of the higher interest rates on CDs without committing too much money to a lengthy term. 

An early withdrawal CD penalty refers to the money banks are often legally required to charge for an early withdrawal of the funds in the CD. Under federal law, banks generally must charge seven days interest on any CD closed within six days of opening, and they are free to charge more. That’s because CDs are designed to pay higher interest in exchange for locking up deposits, which banks in turn use to fund loans.

A typical penalty is six months of interest for CDs of a year or less, and a year of interest for a CD that matures in more than a year. 

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at [email protected].