How CD interest is calculated
Banks advertise CDs by APY - annual percentage yield - which already includes the effect of compounding. That makes the math clean: your balance grows by exactly the APY over a full year regardless of whether the bank compounds daily or monthly, so a 12-month CD at 4.5% APY turns $20,000 into $20,900. The compounding choice only changes the underlying nominal rate the bank applies, which this calculator shows as a note.
The trade for that guaranteed rate is your liquidity: withdraw before maturity and you'll typically forfeit several months of interest. Match the term to money with a known purpose date - a car purchase next year, a house down payment in three - and keep truly flexible cash in savings instead.
Frequently asked questions
CD or high-yield savings - which should I choose?
A CD locks in today's rate for the full term - valuable if rates fall - but charges an early-withdrawal penalty, often several months of interest, if you need the money sooner. A high-yield savings account stays fully liquid but its rate floats. Money with a known date suits a CD; your emergency fund does not.
What is a CD ladder?
Splitting your money across staggered terms - say equal parts in 1-, 2-, 3-, 4-, and 5-year CDs - so one matures every year. Each maturing CD is reinvested at the long end. You capture longer-term rates while a slice of your money comes free regularly, softening both rate risk and the liquidity problem.
What happens when my CD matures?
You get a short grace period, typically 7-10 days, to withdraw or move the money. Do nothing and most banks auto-renew you into a new CD of the same term - often at a much worse standard rate than the promotional one you signed up for. Set a reminder for the maturity date.