CD Calculator

The CD calculator tool will show you how much money you'll have when your certificate of deposit matures. Enter the amount invested, bank interest rate and term to see final balance and interest earned during that time. It offers more features than calculators on banks' websites. It supports two ways to enter interest rates, calculates penalties for early withdrawal (whereas other tools just mention it), and allows you to compare interest rates from different banks so you can see how much value there is in shopping around.

What is a fixed deposit account?

A CD (Certificate of Deposit) is a contract between a bank and a customer. In exchange for depositing a certain amount of money for a set period of time, which cannot be withdrawn, the customer receives interest from the bank at a predetermined rate. The term can range anywhere from three months to five years, during which time the interest remains constant. The fixed interest rate is what makes CDs unique. While checking accounts can have their rates lowered within a week, this is not the case with CDs. Because you know exactly how much money will be available at the end of the term, CDs are often a good choice for funds that need to be used for specific purposes, such as a down payment on a house, wedding expenses, or purchasing a car in eighteen months. In the United States, CDs issued by insured banks are guaranteed up to $250,000 per customer, per bank, and per account type by the FDIC. Credit unions have a similar guarantee through the NCUA. The combination of "guaranteed interest rate" and "government insurance" is what makes CDs considered a low-risk, low-return investment.

A certificate of deposit (CD) is a type of investment in which you can only make one initial deposit. Unlike with a checking account, it's usually not possible to add more money after the CD has been opened. So this calculator requires that you enter an initial amount to invest when opening the account, rather than a monthly savings rate.

The calculation behind the numbers.

Because a certificate of deposit is an interest-bearing investment with compounding interest, the standard compound interest formula is used to calculate its future value at maturity.

A represents the ending balance, P is the principal amount invested, r is the nominal annual interest rate as a decimal, n is the number of times per year that interest is calculated by the bank, and t is the length in years. The actual interest earned is the difference between A and P when you pay back your original investment.

If a bank gives you the annual percentage yield (APY), that value is already factored into the formula, which simplifies it. For this reason, before doing any other calculations, this calculator will ask what interest rate you have.

Example calculation:

We will invest the amount $10,000 in a fixed rate investment (CD) with an annual compound interest of 5% for three years. So P = 10,000, r = 0.05, n = 1 and t = 3.

The final balance is therefore $11,576.25, of which the interest income is $1,576.25. Note how the interest increases each year. In the first year it is $500,, in the second year it is $525 and in the third year it is $551.25.. This increasing annual interest income is a result of compounding. The annual interest is calculated on the balance which includes the interest from previous years.

If you confuse annual percentage yield with nominal interest rate, then your result will be incorrect.

A common mistake when using a CD calculator tool is also the reason why this tool first asks what numbers you have right now. The interest rate shown is the nominal interest rate. The annual percentage yield (APY) is the actual return that takes into account how often the bank compounds interest. Because interest is being paid on the interest itself, the APY will always be higher than the stated interest rate. If a bank calculates interest more frequently than once per year, then the APY will be even higher.

If you enter a nominal interest rate into a calculator tool that asks for APY, you will get an underestimate of the return earned. If then you enter the APY into a tool that calculates monthly compounding, you'll get an overestimate of the return earned. The difference is small on short-term CDs but becomes relevant with longer terms.

The table below shows the results for a nominal interest rate of 5% broken down by frequency of compounding.

With daily compounding you'll get about $42 more than with annual compounding. This is for a deposit of $10,000 over three years. It's real money, but it's not critical to whether one CD is good or bad. What matters much more is choosing an interest rate that's .25% higher than the frequency of compounding. And since banks in the US are required to advertise CDs by APY, comparing APYs is a fair comparison. And this calculator tool does that for you.

Actually calculate penalties for early termination.

Almost all CD calculators note at the end that early termination of a CD will result in penalties. But few tools actually calculate what those penalties will be. This calculator does. Because that amount can be critical to whether or not a CD is even an appropriate place for your money.

Penalty fees are usually calculated as interest for a number of months or days - say 90 days, six months or one year. There is an often overlooked consequence to these calculations: if the penalty fee is based on the interest rate for six months but the certificate was only held four months, then not even the interest for six months has been earned. The bank will then deduct the difference from the original deposit amount. The phrase in the disclosure documents that says "principal may be reduced due to penalty fees" refers to this. It is not a warning of rare and extreme cases but a normal consequence that occurs when money is withdrawn before the period for which the penalty fee applies.

The CD of $ and 10,000 will earn interest at a rate of 4%. If you cancel the CD early after four months, there is a penalty of six months' interest.

At 4% CD negative interest is charged. If you hold the same CD for exactly six months, then you will get back $10,000 You have made neither a profit nor a loss. This is the break-even point and always corresponds to the time when the penalty has been paid off by holding it that long. Prior to this point you are losing money, after this point you retain some of your profits. The table in this calculator's early withdrawal section shows these stair-step changes monthly so you can see where your personal limit is.

There are also investments that completely avoid this problem. No-penalty investments usually allow you to withdraw your money without penalty after the first week, although the rate of return is usually lower. You can run a simulation to see what a 0 month penalty would do. In a rising interest rate market, it may be worth taking a small penalty in order to move into an investment with a significantly higher rate of return, as this could ultimately prove beneficial. This table shows you the cost aspects of this transaction.

Taxes, inflation and the real return you keep

In the United States, interest income from investments is generally considered ordinary income and is taxable even if it is a long-term investment where the bank does not record the interest until the year of receipt. The bank will send out a Form 1099-INT for amounts over $10. At a tax rate of 24%, you would actually keep only $760 from the interest income of $1,000. An exception is investments held in tax-sheltered accounts. Investments in an IRA can be deferred, while investments in a Roth IRA may be completely tax-free.

If you hold a 4% CD for one year with an inflation rate of 3%, your actual return is 1%, not 4%. If the inflation rate exceeds the market's best CD interest rate, then while the CD will protect the nominal value, purchasing power will decrease. Consider an inflation-protected option and calculate the maturity amount in today's currency to get a more accurate picture. Look at this figure, rather than just high interest rates, as it indicates what you can actually buy with your deposit.

Select tenor and ladder strategy

Choose the term based on when you need the money rather than being driven by interest rate tables. Sometimes a shorter-term CD with a lower interest rate is better than one that matures a month later if you'll need the money before then, as early withdrawals can result in penalties and even losses.

If you can't decide on a particular day, then a CD ladder might be the solution. Instead of putting all your $30,000 into one three-year CD, split it up into three CDs of $10,000 each that mature in one year, two years and three years respectively. Every year, one "rung" of the ladder matures. You can either use this money or reinvest it at current rates into a new three-year CD. After the first cycle you will have only three-year CDs in your portfolio. These usually offer higher interest rates, and every twelve months a CD matures. A barbell strategy achieves the same goal in a different way by investing funds in very short-term and very long-term maturities and skipping the middle ones.

Before you decide on a ladder, enter each section individually into a calculator to get the results, then add up the maturity amounts to estimate the approximate value of this ladder.

Positioning of CD's and other options to consider.

The return on money investments in the form of certificates (CDs) often exceeds the interest rates for checking and savings accounts but is significantly below the long-term average return of stocks. It is suitable for investors who are risk-averse and have a fixed investment horizon.

It's important to mention a few alternative options. High-yield checking accounts often have similar interest rates as short-term CDs but offer more liquidity. If you may need access to cash soon, this can be the better choice. Money market accounts are also an option and allow for checks and debit cards. Short-term Treasury bills are also safe and often not subject to state taxes, with yields sometimes higher. On the other hand, paying off high-interest debt provides a guaranteed return of the interest rate on the debt itself, which is almost always better than any CD out there.

How to use this calculator:

Start with the three basic pieces of information you would normally get from a bank: deposit amount, interest rate and term. Indicate whether the stated interest rate is an annual percentage yield (APY) or a nominal interest rate. If it's a nominal interest rate, select how often compounding occurs so that the tool can calculate the APY. Select between months and years for the term to see your ending balance immediately. Then open up the corresponding options. Compare the APY with another offer from another bank to figure out the difference. Add in your tax rates to see how much money you actually have available. Add in inflation rate to understand what you can buy with it. Open up the early withdrawal section to find out what fees would be incurred if you were to liquidate the CD prematurely.

You can also use the tool in reverse. Leave the deposit amount blank and enter your desired ending balance to see how much you need to deposit. Leave the interest rate blank to find out what APY is required to meet your goal. Leave the term length blank to figure out how long you need to invest for. If you input three of the four values, the fourth will be automatically calculated.

This calculator is for educational and planning purposes only. It does not constitute financial advice or an offer of any particular rate. Rates, penalties, minimum deposits and tax rules can vary by institution and country, and the formulas banks use to calculate penalties may differ slightly from the methods used here, which are based on number of months. Please read the disclosure documents for each CD carefully before investing.