Certificate of Deposit (CD) Calculator

A certificate of deposit is a savings product where you commit a fixed sum for a fixed term in exchange for a higher rate than an ordinary savings account. The rate is fixed at purchase. In the United States, deposits at FDIC-insured institutions are covered up to $250,000 per depositor, per institution, per ownership category - which makes a CD primarily a term decision rather than a credit decision.

• The trade-off is access, not safety. Your money is locked until maturity. Withdraw early and you pay a penalty, usually measured in months of interest rather than a flat fee.
• Terms run from about 3 months to 5 years. Longer terms generally pay more, because you are compensated for the longer lock-up.
• The rate is set at purchase and does not move with the market for the life of the term. If market rates rise, your CD stays where it is.
• Automatic renewal is common. Most CDs roll into a new term at maturity unless you act within a grace period, typically 7-14 days.

Note. Coverage is per institution, not per account. Splitting $400,000 across two accounts at the same bank does not give you $500,000 of coverage - two institutions do.

Banks quote CDs in APY, not nominal rate, so the compounding is already inside the advertised figure. Enter the APY and the term in years - a 6-month CD is 0.5, an 18-month CD is 1.5.

Interest compounds until maturity and is then either paid out or reinvested, depending on the terms you chose at purchase. Choosing to reinvest means the next term starts from a larger balance - which is the only way a CD compounds across terms, because a single CD compounds within its own term only.

The penalty is the part people underestimate. It is usually expressed as months of interest, and it can erase a substantial share of what you earned.

The exact penalty is disclosed before purchase and varies by institution and term. Read it rather than assuming. Two structures to watch for:

• Penalty calculated on principal only - the more common and slightly less punishing form.
• Penalty that can reduce principal - where an early withdrawal leaves you with less than you deposited. This exists and it is stated in the fine print.
• No-penalty CDs exist and typically pay slightly less. They are worth comparing if there is any real chance you will need the money early.

A ladder spreads money across several terms so that something matures regularly. You get closer to long-term rates while keeping cash accessible on a predictable schedule.

As each rung matures, you either spend it or roll it into the longest rung. Either way you always have one maturity falling due within six months, which removes the all-or-nothing quality of a single long lock-up.

The weakness of a ladder in a rising rate environment is that you locked in the low rungs first. The weakness in a falling environment is the opposite. Laddering does not predict rates - it removes the need to predict them.

1. Comparing a CD rate to a savings account rate without checking whether it is APY. Both should be quoted as APY. If one is nominal, the comparison is wrong.
2. Ignoring the grace period. If you do nothing at maturity, the CD usually renews automatically into a new full term at the then-current rate - locking you in again on terms you did not choose.
3. Forgetting taxes. Interest is generally taxable in the year it is credited, even if you do not withdraw it. A CD inside an IRA defers this.
4. Chasing the highest rate from an unfamiliar institution. Confirm FDIC membership and the coverage limit first. A higher rate at an uninsured institution is a different product with different risk.
5. Putting everything in the longest term. The rate premium for five years over three is usually modest, and the cost of being wrong about needing the money is not.