How the CD Interest Rate Calculator works
The CD Rate Calculator enables you to know from the start how much a CD will be worth by the end of its term, based on the interest rate you’re being paid on the certificate.
The CD Rate Calculator works by asking you to enter three pieces of information:
- Deposit Amount – This is the amount you’re investing in the CD.
- Annual Interest Rate – This should be the annual percentage yield, or APY, the CD is paying, not the note rate. The APY is the effective interest rate you’re being paid, reflecting compounding.
- CD Term (years) – You can enter from one to 30 years. But most CD terms cut off at five years, and only a few go as long as 10 years. But you may want to use 30 years if you plan to roll over your CDs as they mature. You’ll use the slide bar to select the number of years.
Let’s work an example, assuming the following information:
- Deposit Amount: $10,000
- Annual Interest Rate: 2.00%
- CD Term (years): Five years
With that information entered, you’ll hit the “Calculate” button, and the results will include the “Total Amount”, which is what you’ll be paid at the end of the CD term, as well as “Interest Earned”, which will indicate the amount of interest you’ll earn during the term of your CD investment.
Based on the information above, the Total Amount will be $11,050.79, and Interest Earned will be $1,050.79. That’s the amount of interest you will have earned over five years, not on an annual basis. The remaining $10,000 represents a return of the principal amount invested.
Using the CD Interest Rate Calculator to show results with rollovers
If you plan to roll over the CD at the end of each term, you can use the calculator out to as long as 30 years. If you do, the Total Amount will be $18,212.09, with $8,212.09 being interest earned over the 30-year term, and $10,000 in returned principal. (All based on the information from the example above, carried out to 30 years.)
In that way, this calculator will also function as a CD ladder calculator.
Why you should use CDs
Despite relatively low returns when compared with the long-term returns on stocks, CDs serve a number of very valuable purposes in both your finances and your investment portfolio.
Below are some examples.
You’ll have a rate locked-in
Should rates fall, the returns your earnings on other savings instruments, like savings accounts and money markets, will decline in step. But a CD gives you the ability to lock-in a current rate for the entire term of the certificate.
If you’re currently earning 2% on a high-yield savings account, and you’re concerned interest rates are headed lower, you can simply lock in that rate on a CD. You’ll retain that rate even if rates continue to fall.
They’re good for semi long-term goals
Everyone has short-term spending needs, that are typically met with a checking account. And retirement plans provide for financial needs many years or decades into the future. But if you have a definite spending plan coming up within the next year or two, a CD is a perfect way to match savings with that goal.
For example, let’s say you plan to purchase a new car in two years. You’ll need a $5,000 down payment, and you want to make sure the money is absolutely safe and available when that time comes. You can invest in a two-year CD that will be ready and waiting when it’s time to make the buy. CDs are also indispensable when planning for other major events, like an upcoming wedding, a major house repair, or the down payment on a new home.
A CD is a way of locking funds into the financial equivalent of a safe deposit box. Because they have a specific term, you won’t be tempted to use the funds for an unrelated purpose.
They can occupy a corner of your portfolio dedicated to fixed income
Conventionally, the most common portfolio allocation is some sort of split between stocks and bonds. In theory, at least, bonds represent a safe, interest income generating allocation that will minimize the impact of falling stock values.
In reality, however, bonds are not entirely safe. Though they typically will pay the full amount of principal invested upon maturity, they can decline in value between now and then. This is what is known as interest rate risk, which reflects the reality that bond prices tend to fall when interest rates rise. The risk is greater the longer the term of the bond is.
Since rising interest rates can affect both stocks and bonds negatively, the two might move in tandem at a time when you would expect the bonds to provide greater protection.
This is where CDs come into the picture
Because they’re shorter in term – generally not more than five years – there’s virtually no interest rate risk with CDs. If you invest $10,000 in the CD for two years, you’ll get back the full $10,000 at the end of the term, plus interest.
That makes a CD investment completely safe. That’s what investors hope bonds will do, but that’s never entirely certain.
They eliminate the risk of defaulting
Virtually every type of bond, apart from US Treasury securities, carries the risk of default. But because CDs are issued by FDIC insured banks and by NCUA insured credit unions, there’s virtually no chance the issuer will default on your certificate.
CDs are an excellent way to carve out at least a portion of your investment portfolio that will be truly risk-free.
Money Under 30’s CD Interest Rate Calculator can help you understand how much your CDs will be worth when they’ve matured. This can help you choose a CD that has the right terms and APY for your financial goals.