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If you’re looking for a safe way to grow your money, a certificate of deposit (CD) could be right for you.
A CD is a federally insured savings account with a fixed interest rate offered by most banks — but there’s a catch. If you open a CD account, you’re agreeing to leave your money alone for a specific number of months or years.
If you’re OK with that trade-off, opening a CD is a savvy way to put your savings to work and could align nicely with your financial goals. For example, you might want to save for a down payment five years from now, or may want to build your savings without exposing them to the stock market.
However you use it, a CD is a tool you can use to park your money and earn interest on it.
How We Calculate Your CD Earnings
By filling in some key pieces of information, our calculator tells you how much you can expect to earn on your CD investment and the total balance over time.
If you’re considering a CD or looking to better understand how they work, enter the initial deposit amount, length of CD term, and the APY rate into our calculator. Compare different CDs to help you choose one that best fits your needs before you open an account. You can play around with the numbers on the CD rate calculator to determine how much interest you can earn with different CDs and see how much to invest to reach your savings goal. Here are some important terms you should know when it comes to CDs:
Initial deposit amount
The amount you’ll deposit to initially open the CD. Some accounts require you to deposit a minimum amount.
Length of CD (months and years)
The amount of time you’ve agreed to leave your funds untouched in a CD account, or there’s an early withdrawal penalty. This is also known as the CD’s term.
The annual percentage yield (APY) is the rate of return you’ll earn annually and takes compounding into account.
A percentage of money that’s added on top of your principal investment over the course of the CD term.
Your initial deposit plus interest earned that is available for withdrawal at the end of your CD investment term.
How Do CD Rates Work?
CDs are considered low-risk investments, but it’s still beneficial to comparison shop to find the best CD rates.
CDs offer a fixed rate of return upon maturity. While online banks tend to have better CD rates — compared to legacy banks and credit unions — they aren’t as competitive as they once were, because of recently lowered interest rates.
For instance, the national rate for a traditional CD under $100,000 with a one-year term is less than 1%, according to the FDIC — a rate that’s topped by most high-yield savings accounts where you can withdraw your money whenever you want. Exact CD rates differ across financial institutions and can partly depend on the length of the term.
Keep in mind that a maturity date is usually based on the term of the CD, which could be as short as three months or as long as five years. The most common CD lengths offered by banks are the one-year, 18-month, two-year, three-year, four-year, and five-year term. And take into consideration minimum deposit requirements for CD products, since they vary from $0 to $1,000 or potentially more.
How to Choose the Right CD for You
CDs generally earn higher interest rates than most savings and money market accounts, although that’s not necessarily the case right now with historically low interest rates meant to support an economy challenged by the COVID-19 pandemic.
So depending on your financial goals, you’ll need to weigh the pros and cons of a CD and figure out whether you want to open a short-term, mid-term, or long-term CD account. By picking the right CD term for you, you’ll also avoid any early withdrawal penalties. Once your CD reaches maturity, you can withdraw your initial deposit plus interest earned.