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Certificates of Deposit (CDs) can be an outstanding investment tool if you have extra money and you can do without for a while. Before you buy a CD, be sure to check the terms and conditions. Run the key figures through our CD calculator to make sure the earnings potential is strong.

For more information about building your wealth using CDs, see our frequently asked questions below. If you like our site, please pass it on to your friends.


What is a CD calculator used for?

A CD calculator is especially useful for determining potential Certificate of Deposit earnings. This helpful tool shows you how much interest you can earn with any CD you are considering.

You'll enter the following details to discover the earnings during maturity:

Initial deposit: The amount of the beginning balance on your CD
Months: The term until maturity, stated in months.
Interest rate: The rate of return promised in a CD.
Annual Percentage Yield (APY): The yearly rate of return you will earn on an investment.

A CD calculator will save you time and bring clarity to the financial performance of a CD. It is an essential tool in any money saving strategy.

What is a certificate of deposit (CD)?

A CD is comparable to a savings account. Depending on your savings goals, they can both be effective savings vehicles.

The CD, though, includes a contract between the depositor and the financial institution.

You deposit money into a bank, credit union or thrift, who, in turn, gives you a promissory note, or "certificate."

This certificate states the pre-specified term for which your deposit will earn interest.

The interest rate, or APY, is pre-determined by the financial institution, but you can choose how long you want them to hold your investment. You will choose between several term options, which are typically in three or six-month intervals.

For each CD offered, the financial institution will list specific terms and conditions. As a general rule of CDs, the longer the term, the higher interest you'll receive.

How does a certificate of deposit work?

Both the depositor and the financial institution are entering a mutually beneficial exchange.

As the depositor, you benefit by receiving a fixed rate of return. You don't have to stress about fluctuations of savings rates. You can often score a premium interest rate for agreeing to keep your money in a CD for the duration of its term.

On the other side, the institution benefits by having your money under control for a specified period of time.

How much do CDs pay?

A certificate of deposit pays the amount determined by the terms and conditions of the CD.

In other words, it pays the interest rate of the CD so long as you leave the money deposited until it's maturity date. That said, many variables affect the rates you may earn.

For example, a $10,000 CD will likely yield higher interest rates than a $1,000 CD. Similarly, a one-year CD will almost always earn higher rates than a three-month CD.

Who should invest in CDs?

While anyone can purchase one, a CD is ideal for someone seeking to invest long-term while limiting their risk exposure.

CD investments are perfect when you have some extra money you can set aside for a while. Unlike a savings account, A CD cannot be used for emergencies and you can't add to your balance.

But a CD will usually perform better than a savings account. And if you want to build your balance through CDs, you can always purchase another certificate.

CDs are very helpful in establishing a healthy and balanced portfolio. This is especially true in turbulent economic times.

As with all investments, consider your risk tolerance level when determining how much to invest in a CD.

Can you lose your money in a CD?

CD accounts are FDIC insured up to $250,000, making them a low-risk investment.

Your promissory note ensures you will receive the rate you agree upon, so long as you leave your money deposited until it's maturity date.

In this sense, a CD account does not lose value.

Can you take your money out of a CD early?

The only way you can lose money is through early withdrawal of your deposit.

Early withdrawal usually comes with a hefty penalty which can eliminate some or all of your accounts performance gains, or even cut into your initial deposit amount.

So yes, you can take your money out of a CD before it matures, but it's not advised.

Are you taxed on CDs?

As a general rule, you are taxed on the interest earned from your CD each year. If your CD matures the same year you purchased it, all interest is taxable for that year.

For multiyear CDs, only the interest earned each year is taxable. You are not taxed on the principal amount you deposited, though.

Taxes are assessed at your income tax rate, not as a capital gain. For instance, if your income tax bracket is 25% and your CD earned $200 interest for the year, you will owe $50 in taxes.

Look for a 1099-INT statement from your financial institution and use that information on your taxes.

What is a CD ladder?

"Laddering" is a technique many CD investors employ to reduce a CD's drawbacks. It allows you regular access to part of your money while also protecting you against rising interest rates.

Laddering works by dividing your investment amount into equal parts in CDs with different durations.

Let's say you have $12,000 to invest. You would deposit $4,000 in a one-year CD, $4,000 in a two-year CD and $4,000 in a three-year CD.

With this laddering strategy, every year a CD would reach maturity. At that point, you could either withdraw your money or re-invest it in another three-year CD to keep your ladder in place.

Laddering is a popular CD investment strategy because of the following benefits:

  • You're always receiving better interest rates because you're always investing in longer-term CDs.
  • You have regular access to cash, free of penalty, each time a CD reaches its maturity date.
  • You have a chance for more favorable returns if interest rates are higher when you re-invest.

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