When you open a CD, you’re probably thinking about the higher interest rate you’ll get, and how much money you’ll have when the CD matures. However, the odds are good you’ll be at least slightly curious about how much money you’re getting back, especially if you’re saving for a financial goal.
Fortunately, it’s not hard to figure out the interest you’ll get from a CD. You just need to be aware of a few factors.
What determines how much interest will I earn on a CD?
The Interest Rate
The biggest factor that will determine how much your CD will earn is the interest rate. You’re probably aware that interest is the money your money earns while you’re keeping in an account like a CD, and that the interest rate is the percentage of money your money will earn. However, you might not know that credit unions and banks have different ways they talk about interest
Got questions about CD interest rates? Ask us!
The Term of the CD
Speaking of months, you’ll also need to know how long you’ll have the CD open, otherwise known as the term. If you have a CD with a term you can measure in years, like 12 months, 24 months or even 60 months, all you have to do is multiply your deposit by the APY. However, if you have a short-term CD that’s less than a year, or a year and a few months, you’ll have to do a bit more calculating.
All you have to do is calculate the dividend rate of the CD, then multiply that rate by the number of months in your CD. If you have 1,000 in an 8-month CD with a 3% interest rate, for instance, first multiply 1,000 by .03, which will give you 30, and divide that by 12, to get a dividend rate of $2.50 a month. Multiply that by 8, and you can discover that you’ll ultimately get $20 when your CD matures.
Of course, that amount isn’t quite accurate. There’s one more very important factor you’ll need to remember…
Compound interest is the secret ingredient of investors and businesses worldwide. Put simply, it’s the interest your interest earns.
Let’s say you put $5,000 in a 60-month CD that pays 4% interest. After the first month, you’ll get $16.67 in interest. After the second month, though, you’ll be getting 4% based on the $5,016.67 in your account, which will give you $16.72 in interest. Admittedly, this isn’t a huge amount, but the next month, you’ll earn a bit more and a bit more for the next 58 months. Eventually, your money will earn an additional $104 in compound interest in addition to the $1,000 of interest
If you’d like to calculate how much you’ll earn on a CD including compound interest, you can use the formula A = P(1 + r/n)^(n*t). In this formula,
- A = Total amount at maturity
- P = Initial investment
- r = Interest rate
- n = Number of times interest compounds per year
- t = Number of years
Of course, you can also use a compound savings calculator, like the one on First Alliance Credit Union’s website. All you need to do is enter a few key details about your CD, and the calculator will tell you how much you’re getting back.
Open a CD at First Alliance Credit Union
One of the many advantages a CD offers is that figuring out how much money you’ll get back is pretty easy. When you know the interest rate and the term of the CD, you can plug that information into a formula that will help you figure out how much you’ll get when the CD matures. An online compound interest calculator will make the process even easier.
If you’d like to see what a CD can do for your money, become a member of First Alliance Credit Union and talk with a member advisor about opening a CD account today. As an added bonus, you’ll be able to keep track of your CD’s progress with our online banking platform and mobile app.