A certificate of deposit is about the simplest deal in banking. You lock your money away for a set time, and the bank pays you a fixed rate for it.
The only awkward part is working out what you’ll have at the end. The answer depends on the rate, the term and how often the bank adds interest to your balance. This CD calculator takes care of all three, and works just as well for what banks in many countries call a fixed deposit.
How to use the CD Calculator#
- Enter your deposit. This is the amount you put in on day one.
- Enter the interest rate. Use the yearly rate the bank quotes.
- Enter the term. Choose months or years.
- Pick how often interest is added. Your bank states this in the account terms. Monthly is common.
- Read the result. You get the balance at maturity, the interest earned and the effective yield.
The formula behind it#
A CD earns compound interest, which means interest is paid on the interest you have already earned.
Here n is the number of times interest is added each year. Put 10,000 into a 12-month CD at 4.5 percent with monthly compounding. The balance at maturity is 10,459.40, so you earn 459.40. That’s slightly more than 4.5 percent of 10,000, because of the compounding, and it gives an effective yield (APY) of 4.594 percent.
How much does compounding matter?#
It matters less than most people expect. Here’s the same 10,000 at 4.5 percent for one year, with different compounding schedules:
| Interest added | Balance after 1 year | APY |
|---|---|---|
| Once a year | 10,450.00 | 4.500% |
| Twice a year | 10,455.06 | 4.551% |
| Quarterly | 10,457.65 | 4.577% |
| Monthly | 10,459.40 | 4.594% |
| Daily | 10,460.25 | 4.603% |
Going from yearly to daily compounding adds about 10 to this deposit. The rate and the term do far more work. If you’re comparing two offers, compare their APYs, which already include compounding.
The term changes things#
A longer term usually comes with a higher rate, but your money is stuck for longer. Using the same 10,000 at 4.5 percent compounded monthly, you would have 10,939.90 after two years and 12,517.96 after five. You also need to ask whether you’ll need the cash before then.
What to check before you lock money in#
- Early withdrawal penalty. Taking money out early usually costs you some of the interest, often several months’ worth. Read the terms.
- Is interest compounded or paid out? Some banks, in many countries, pay simple interest at the end or pay it out regularly rather than adding it to the balance. Ask which. If interest is paid out, choose “once a year” for a one-year term as a close match.
- Deposit protection. In the United States, deposits are generally insured up to $250,000 per depositor, per bank, by the FDIC or NCUA. Other countries have their own schemes with different limits.
- Tax. Interest is usually taxable. This calculator shows interest before tax.
- Inflation. If prices rise faster than your rate, your money buys less at the end, even though the balance is higher.
A simple ladder#
If you want better rates without locking everything away, you can split your savings across CDs of different lengths, such as 6, 12 and 18 months. When one matures, you either use the cash or roll it into a new CD. It’s called a ladder, and it gives you regular access to some of your money. For converting a stated rate into a yield, try the APY calculator.
A laddering example#
Instead of putting all your savings in one CD, a ladder splits the money into several terms. With ₦3,000,000, you might put ₦1,000,000 each into 1-, 2- and 3-year CDs. When the first matures, you reinvest it in a new 3-year CD, and so on. After a few years, one CD matures every year, which gives access to cash and usually better rates than a single short term. Check the penalty for early withdrawal and whether the rate is fixed, and compare accounts by APY.
Frequently asked questions#
Interest is added to your balance at regular intervals, and later interest is earned on the larger balance. The formula is deposit × (1 + rate ÷ n) ^ (n × years).
With monthly compounding you would have 10,459.40 at maturity, so you would earn 459.40.
The rate is the stated yearly figure. The APY includes the effect of compounding, so it’s a little higher whenever interest is added more than once a year.
Your balance doesn’t fall if you hold to maturity. You can lose some interest, or occasionally part of your deposit, by withdrawing early, depending on the terms.
They’re very similar. Both lock money for a fixed term at a fixed rate. The details, such as how interest is paid, vary by bank and country.