Find out how much interest you can earn over time in certificates of deposit using our CD calculator.
Whether you are looking for a 5 year CD calculator or a 6 month CD calculator, you can discover how much interest can be earned.
What Is A Certificate of Deposit?
When it comes to investing your cash savings, you have got lots of choices:
- Savings accounts
- CDs (or certificates of deposit)
- Bonds
- Stocks
- Real estate, or even
- Cryptocurrencies!
Stocks and bonds may be familiar but what are certificates of deposit?
A certificate of deposit is a savings certificate with a fixed interest rate and fixed maturity date.
CDs may pay higher rates than standard Savings accounts but your cash is usually tied up.
The risk is perceived to be low when you deposit funds into CDs, which are generally fee-free at most banks and credit unions.
Most CDs issued by commercial banks are FDIC insured up to $250,000 per person. And if you purchase a Share Certificate from a credit union, you will be insured up to the same level by the National Credit Union Administration (NCUA).
Compare Savings Accounts vs CDs
The big difference between a savings account and a CD is your money is locked up when you deposit funds into a CD.
If you decide to withdraw funds prior to the maturity date, you will usually be charged a steep penalty.
But CDs have flexible term lengths that vary from a few months to many years. So, if you know that you won’t need to dip into your funds anytime soon, a longer time span may be appropriate.
| “When you deposit money into a CD, it is locked up for a fixed time. The longer the term length, the higher the interest earned usually” |
On the other hand, if you expect that you will need money to pay for an upcoming purchase, like a car, boat, home, or even a wedding, then a Savings account may be a better choice.
You can often earn as much as 50% more interest from CDs compared to high yield Savings accounts over the same time period.
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How Much Is
The Early Withdrawal Penalty?
When you withdraw your money from a CD before the fixed maturity date, you will be charged an early withdrawal penalty.
Usually, the penalty amounts to a portion of the interest but it typically won’t affect your principal invested.
The amount usually varies depending on the term length of the CD and the terms stipulated by your bank or credit union.
Keep in mind that insurance coverage by the Federal Deposit Insurance Corporation and National Credit Union Administration will not cover penalty fees, so make sure you have enough cash set aside to cover emergencies before locking it up in a CD.
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What Are CD Ladders?
If the idea of tying up your money in a long term CD doesn’t whet your appetite, a CD ladder might be a good fit.
The way a CD ladder works is you invest your money across different term lengths.
Let’s say you had $5,000 available to invest in CDs. Rather than choose between a 6-month CD and a 10-year CD, you could spread your money proportionately across a variety of CDs with different term lengths.
For example, you could place $1,000 in a 1-year CD, and a similar amount in a 2-year CD, 3-year CD, 4-year CD, and 5-year CD.
When the shortest term CD matures, you can invest it into a new 5-year CD.
As each CD matures, you repeat the process so that eventually a 5-year CD will mature each year, meaning you’re always getting the benefit of maximum interest on all your money while maintaining liquidity on a portion of your invested capital.
What Types of CDs Exist?
CDs come in a variety of shapes and sizes, so to speak.
The “plain vanilla” CD where you deposit your money for a fixed term length and cash in subsequently on the interest earned is just one of the many types of CDs.
Others types of CDs include the IRA CD, Step-up CD, Bump-up CD, Jumbo CD, and Liquid CD.
| IRA CD | An IRA certificate of deposit is regular CD held in an IRA retirement account that enjoys tax advantages. |
| Step-up CD | In a step-up certificate of deposit, interest rates step-up or increase at regular and predictable intervals. |
| Bump-up CD | When banks increase CD rates, you can request a bump-up to the new interest rate. Generally, you will be restricted to no more than a couple of requests during the term length. |
| Jumbo CD | Jumbo certificates of deposit usually pay higher interest rates but require high minimum balances of often six figures or more. |
| Liquid CD | Liquid certificates of deposit allow you to access your money but usually impose higher minimum balance requirements and pay lower interest rates. |
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Is A Certificate Of Deposit
Right For You?
A certificate of deposit may be right for you if you can check all the boxes on the questions below.
| Do you have emergency funds set aside that you can access? | ✅ |
| Can you afford to tie up savings for anywhere from a few months to a few years? | ✅ |
| Do you prefer a fixed rate of return versus a variable return on your investments? | ✅ |
| Would you like your money to be guaranteed by the government? | ✅ |
Have you invested in certificates of deposit? Did our bank CD calculator answer your questions on how much interest you can earn? Share your investing tips in the comments below, we would love to hear from you.
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