Things to Know about CD Calculators
A certificate of deposit, or CD, is a type of savings account where one can lock in funds for a specific duration. The bank or credit union provides a high annual percentage yield as CD interest. One can rely on these returns if the funds remain untouched for the rest of the term. There are ways how to calculate CD interest, including a CD rate calculator, a tool that helps compute the amount earned after maturity.
What should one know when selecting the CDs?
Before learning how to use the CD rate calculator, there are some things one must know when choosing between the different CDs.
- Longer terms do not always mean higher rates
Some CDs give higher rates on a year term, while others may have a lower average for three years.
Short-term CDs have a shorter wait time before one can withdraw the funds. However, long-term CDs allow one to earn more interest. Choosing the latter can provide high yields for the decided term, whereas withdrawing before the term will attract penalties.
Not every bank offers competitive rates on CDs. So, conduct a thorough analysis before choosing one.
Why one should use a CD calculator?
There are multiple benefits of using a CD rate calculator. These include:
Determines the interest earnings
When one learns how to use the CD rate calculator, one can prompt in all the details to compute the interest the funds yield in the selected CD.
Compares CD accounts
One can also use the calculator to compare the CD accounts with other saving options, such as:
- Money market account Accounts
- High-yield savings accounts
- Other CDs
This comparison can help one determine the best investment options that will reap maximum returns.
Explores growth opportunities
A CD calculator also allows one to experiment with different combinations, such as:
- Interest rates
- Deposit amount
- Terms
In addition, it assists in determining which combination can fetch the most attractive yields.
Eliminates guesswork
By using the CD calculator , one can eliminate uncertainty by knowing the growth in the invested fund. Moreover, entering the numbers into the calculator spares one from having to do complex math.
Terms to know for using the CD interest calculator
To understand the CD calculator results, one must be well-versed in a few terms. These are as follows:
- Initial deposit
This is the sum one has to deposit into the CDs. Typically, one can make a single deposit unless one has an add-on CD. Certain banks will have a minimum deposit requirement for the CD. - Term length
This is the duration for which one is willing to keep the money in the CD. The terms often last anywhere from six months to five years. - Maturity date
The CD matures when the term length expires. However, if one withdraws before this date, a penalty may be imposed, which reduces the interest earned on the CD. - Annual Percentage Yield (APY)
This percentage determines the interest earned on the CD in a year. It is the rate of the CD .
How to use CD rate calculator?
Using the CD rate calculator is straightforward, as one only needs three specified numbers.
- Deposit amount – The fixed amount one is willing to invest
- CD term length – The duration for which one is willing to park the funds. It is in years or months and whole numbers. For instance, if the tenure is 1.5 years, one has to enter 18 months.
- Enter the APY – The last step is to plug in the current CD rates offered at different banks. Next, enter the rate offered by the chosen bank. It will help compare the options.
Understanding the CD calculator results
- Total interest earned – This is the amount the bank pays on the CD. The initial deposit, CD term, and the rate determine the interest amount.
- Total balance – This is the final amount one receives when withdrawing the CD on maturity. This amount will include the compounded interest and the initial deposit.
CD calculator assumptions
Broadly, the CD calculator uses the following assumptions:
- One does not withdraw before term maturity
Letting the money grow in the CD until its maturity ensures full-interest earnings. On the contrary, early withdrawal attracts a penalty and forfeits the remaining interest amount. - One has the share certificates at a credit union and CDs at the bank.
The other elements that are not covered fall under the brokered CDs. These are the CDs by a brokerage firm and do not compound interest. - One allows the interest to grow in the CD
Typically, banks present two options for the interest- keep the interest in the CD through its entirety of the term or receive regular interest as payouts in a separate account.
The former is relatively more common, but some people choose the latter as it gives them a stable income source at regular frequency , quarterly or monthly. However, when one takes out regular interest payouts from the CD, the interest does not compound, affecting the growth of the balance .
