How to calculate the yield on your CD

One of the benefits of a certificate of deposit is predictable returns. Your annual percentage yield, or APY, is fixed when you open a CD, so you’ll earn the same return over the life of the CD, regardless of where overall rates go.

But to determine which CD best suits your savings goals, it’s important to know how to calculate these returns. Read on to learn how to estimate your income so you can compare offers from different banks and credit unions.

How do you calculate the yield on your CD?

To calculate the yield on your CD, you need a few key elements: the principal, the interest rate, the compounding frequency, and the term. However, you can simplify the calculation by looking at the APY, which takes into account the interest rate and the compounding frequency. For example, if you deposit $10,000 in a one-year CD with an APY of 4.5%, you would multiply $10,000 by .045, which equals $450.

Understanding CDs and Their Returns

A certificate of deposit is a low-risk savings product available from most banks and credit unions (although they are referred to as “stock certificates” at credit unions). You don’t get your money back from a CD until the term or maturity date has passed, unless you are willing to pay an early withdrawal penalty that can wipe out your return.

You can withdraw interest at certain times, such as monthly or quarterly, if you need additional income. But to maximize your returns and take advantage of compounding (more on that later), don’t touch the money in your CD.

Understanding CD Interest Rates

CDs are fixed-rate products, meaning you can lock in an interest rate that won’t change until the term is up. For example, if a bank advertises a 4% interest rate on a 12-month CD, you can open one tomorrow and be confident that the 4% will stay the same for the 12 months. This is different from a savings account, which has a variable interest rate that can change at any time.

However, the interest rate isn’t what you should focus on when calculating your CD yield. Instead, look at the APY. The APY reflects compound interest, which is essentially interest on top of interest. Simple interest, on the other hand, results in less earning potential: it’s just interest that accumulates on the principal balance of the CD.

For example, if you deposit $30,000 in a 12-month CD with a 5% interest rate that pays simple interest, you will earn $1,500 at the end of the term. If it compounds daily, your profit increases by $38.02 for a total of $1,538.02 in interest. The difference in APY between these two is 5% APY for the simple interest option and 5.127% APY for the compounding option.

Some banks compound interest daily, while others do it less frequently, such as monthly, quarterly, or semi-annually. Look for CDs that compound daily to make more money.

Calculating CD Yields: A Step-by-Step Guide

One of the biggest benefits of owning a CD is that you can predict exactly how much you will earn, down to the penny. Here’s how:

• Determine how much you want to invest in the CD. Suppose you want to put $50,000 into a deposit.
• Make sure you are comfortable with the term. Traditional CDs have early withdrawal penalties, meaning you’ll lose interest (and your returns will be much lower) if you need the money before maturity. In this example, let’s say you’re happy to lock in the money for 12 months.
• Compare APYs. After looking at several banks that offer 12-month CDs, you find a CD with a competitively high interest rate of 4.8%.
• Do the math. Now you have your main inputs: the principal, the time, and the interest rate. If your CD only compounds interest once a year, you simply multiply $50,000 by .048 and see that your total interest income is $2,400. But if your bank compounds interest on your CD daily, your total interest income increases by almost $60 to $2,458.37. Here’s the math:

Compounded annually: $50,000 x (1 + (0.048 / 1))^1×1 = $52,400.00

Compounded daily: $50,000 x (1+(0.048 / 365))^365×1 = $52,458.37

Regardless of whether you calculate the total return on your CD using annual or daily compound interest, the formula for compound interest is:

Opening Balance x (1+ (Interest Rate / Number of Compound Interests per Period)) ^{number of compositions per period x number of periods}

You don’t have to break out your calculator or get lost in a sea of ​​compound frequency formulas to estimate your CD returns. Here are some of the best online tools and calculators to use to predict how much money you’ll have at the end of your CD’s term:

Bankrate CD Calculator: CNET’s sister site offers a CD calculator that makes it easy to see how your potential return compares to the national average.

CIT Bank CD Calculator: CIT Bank pays some competitive APYs on its short-term CDs (5% APY on its six-month CD right now and an 11-month no-penalty CD with a generous 4.9% APY, landing it on our list of the best no-penalty CDs ). But you don’t have to be a customer to take advantage of the bank’s handy CD calculator. We like it because it gives you a good look at different compounding frequencies. If an interest rate looks appealing, use this calculator to determine its actual APY.

Ally CD Ladder Calculator: As an online bank, Ally’s lower overhead translates into some of the most competitive CD rates on the market. The bank’s CD ladder calculator is a valuable tool for anyone looking to estimate returns beyond just a single CD. If you’re planning a more advanced laddering approach, this tool can give you a solid estimate of what you’ll earn.

Fifth Third CD Term Calculator: The return you earn on your CD is not entirely yours. You will have to pay taxes on the interest. Fifth Third’s calculator has an advanced feature that can help you estimate how much you will owe the government.

How to Use These Tools to Calculate CD Yields

All of these tools are intuitive and easy to use. Just make sure you enter the interest rate or APY correctly, as some ask for one or the other. And if you’re considering a slightly larger amount for a CD, make sure you use these calculators to get an idea of ​​your potential increase in income.