How to Calculate the Return on Your CD

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

But to determine which CD is the best fit for your savings goals, it’s important to know how to calculate these returns. Read on to learn how to estimate your earnings so you can compare offerings from different banks and credit unions.

How do you calculate the return on your CD?

To calculate the return on your CD, you need a few key elements: the principal deposit, the interest rate, the compounding frequency and the term length. However, you can simplify the math by looking at the APY, which takes into account the interest rate and compounding frequency. For example, if you deposit $10,000 in a one-year CD with a 4.5% APY, you’d multiply $10,000 by 0.045, which comes out to $450. 

Understanding CDs and their returns

A certificate of deposit is a low-risk saving product available at most banks and credit unions (although they’re labeled as “share certificates” at credit unions). You won’t get your money back from a CD until it reaches the end of its term, or maturity date, unless you’re willing to pay an early withdrawal penalty that can wipe away your return.

You may be able to withdraw interest at certain times -- monthly or quarterly, for example -- if you need extra income. But to maximize your return and take advantage of compounding (more on that later), you shouldn’t touch any of the money in your CD. 

Understanding interest rates on CDs

CDs are fixed-rate products, which means that you can lock in an interest rate that won’t change until the term is over. For example, if a bank advertises a 4% interest rate on a 12-month CD, you can open one tomorrow with the confidence that the 4% will remain the same over those 12 months. That’s different from a savings account, which has a variable interest rate that can change at any time.

The interest rate, however, isn’t actually what you should focus on when trying to calculate your CD return. Instead, look for the APY. The APY reflects compounding interest, which is essentially earning interest on top of interest. Simple interest, on the other hand, results in less earning potential: It’s just interest that accumulates based on the principal balance in the CD.

For example, if you deposit $30,000 in a 12-month CD with a 5% interest rate that pays simple interest, you’ll earn $1,500 at the end of the term. If it compounds daily, your earnings increase by $38.02 for a grand 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 so less frequently, such as monthly, quarterly or semi-annually. Look for CDs with daily compounding to earn more money.

Calculating CD returns: A step-by-step guide

One of the major benefits of owning a CD is that you can predict -- down to the penny -- how much you’ll earn. Here’s how:

• Figure out how much you want to invest in the CD. For the sake of this example, let’s say you want to put $50,000 in a CD.
• Make sure you’re comfortable with the term. Traditional CDs have early withdrawal penalties, which means that you’ll forfeit interest (and your return will be much lower) if you need the money before the maturity date. In this example, let’s say you feel comfortable locking up the money for 12 months.
• Compare APYs. After looking at a variety of 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 most important inputs: The principal, the time and the interest rate. If your CD compounds interest only once a year, simply multiply $50,000 by 0.048, and you’ll see your total interest earnings will be $2,400. But, if your bank compounds interest on your CD daily, your total interest earnings will increase by nearly $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 x 1} = $52,458.37

Whether you’re calculating your CD’s total earnings using interest compounded annually or daily, the formula for compound interest is: 

Initial balance x (1+ (interest rate / number of compoundings per periods)) ^{number of compoundings per period x number of periods}

You don’t have to break out your calculator or get lost in a sea of compounding 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’s CD Calculator: CNET’s sister site offers a CD calculator that’s helpful in illustrating how your potential return stacks up against the national average. 

CIT Bank’s CD Calculator: CIT Bank pays some competitive APYs on short-term CDs (5% APY on its six-month CD right now and an 11-month no-penalty CD with a generous APY of 4.9% that lands the bank 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 this one because it gives you a good understanding of different compounding frequencies. If an interest rate looks attractive, use this calculator to determine the actual APY.

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

Fifth Third CD Maturity Calculator: The return you earn on your CD isn’t all yours to keep. You’ll need to pay taxes on the interest. Fifth Third’s calculator has an advanced function, which can help you estimate how much you’ll need to pay the government.

How to use these tools to calculate CD returns

All these tools are intuitive and easy to use. Make sure that you’re inputting the interest rate or the APY appropriately, as some ask for one or the other. And if you’re considering a slightly larger amount of money for a CD, be sure to use these calculators to get a sense of your potential increase in earnings.