How the CD Calculator Works
A certificate of deposit, or CD, is a savings product where you leave a lump sum with a bank for a fixed time, such as 6 months, 1 year or 5 years. In return, the bank pays a fixed interest rate, usually higher than an ordinary savings account. You get your money and the interest at the end, on the maturity date. If you take the money out early, you pay a penalty. The CD Calculator shows what a CD will be worth, and what leaving it early would cost.
What you enter
- Amount you deposit: the lump sum you put into the CD.
- The rate: either the interest rate (APR), with how often interest is added, or the APY, which already includes the effect of adding interest.
- Term: years and extra months until the CD matures.
- Tax rate on the interest: interest is normally taxed as income. Use 0 if it is not taxed for you.
- Inflation: to show what the result is worth in today's terms.
- Early withdrawal: the month you might cash out, and the penalty, in months of interest.
How the value is worked out
Interest is added to the balance, and then earns interest too, which is called compounding. With a yearly rate r, interest added n times a year, and t years, the value is:
value at maturity = deposit x (1 + r / n)^(n x t)
If you enter the APY instead, the calculator uses it directly:
value at maturity = deposit x (1 + APY)^t
The APY, or annual percentage yield, is the real yearly return after compounding:
APY = (1 + r / n)^n - 1
A worked example
You deposit $10,000 in a 2-year CD at 4.5%, with interest added monthly. Your tax rate on the interest is 22%, and inflation is 2.5%.
| Result | Amount |
|---|---|
| Value at maturity | $10,939.90 |
| Interest earned | $939.90 |
| Effective yearly rate (APY) | 4.594% |
| Tax on the interest (22%) | $206.78 |
| Value after tax | $10,733.12 |
| After tax, in today's money | $10,215.94 |
| Yearly return after tax and inflation | 1.07% |
A stated rate of 4.5% is really a 4.594% yield. But after tax and inflation, the real growth in your buying power is only about 1.07% a year. That is a useful number for comparing a CD with other choices.
Chart: your CD by year
Year 1 ██████████████████████████████████████ $10,459.40 (deposit $10,000 + interest $459.40) Year 2 ████████████████████████████████████████ $10,939.90 (deposit $10,000 + interest $939.90)
Does compounding matter?
For the same rate and term, the more often the interest is added, the more you earn, but the difference is small:
| Interest is added | Value at maturity |
|---|---|
| Yearly | $10,920.25 |
| Twice a year | $10,930.83 |
| Quarterly | $10,936.25 |
| Monthly | $10,939.90 |
| Daily | $10,941.68 |
That is why the APY is the best number for comparing CDs. It already includes the compounding.
The early withdrawal penalty
If you take the money out before maturity, most banks charge a penalty, often several months of interest. The calculator works out the penalty as that many months of interest at the balance you have reached:
penalty = months of penalty x (one month of interest on the balance)
In the example, cashing out after 12 months with a 3-month penalty gives a balance of $10,459.40, a penalty of $117.67, and $10,341.73 in your hands. If the penalty is bigger than the interest you have earned, you can lose part of your deposit. For example, with a 12-month penalty and a withdrawal after only 2 months, you would receive $9,621.76, less than the $10,000 you put in.
Tips
- Compare APYs, not stated rates.
- Match the term to when you need the money. Only lock away money you will not need.
- Read the penalty terms before you open the CD.
- Consider a CD ladder, where you split money over CDs with different terms, so some mature every so often.
- Check that the CD is insured, for example by a national deposit insurance scheme, up to its limits.
What this calculator does not include
- Taxes worked out year by year. The calculator takes a single share of the total interest.
- The exact penalty rules of a bank, which differ. Use the penalty months your bank states.
- CDs that pay interest out regularly instead of adding it to the balance, or that have variable rates.
- What you could earn by reinvesting when the CD matures.
This tool gives an estimate for general information only. It is not financial advice. Your bank's CD agreement has the exact terms.