CD vs. Savings

The number the bank shows you is the wrong one

A CD advertised at 4.5% looks like free money next to nothing. But the money was never sitting at nothing — it was in a savings account earning 4%. The honest figure is the difference between the two, and it is smaller than the rate sheet suggests: half a point on $5,000 for a year is $25, and a quarter of a point on $9,000 for three months is about six dollars.

Twenty-five dollars may be worth having. It is not worth reorganizing your emergency fund for, and that is the decision this calculator is meant to make obvious.

What you are actually buying

Not the extra interest — the fixed interest. A CD is a bet that rates are coming down, and the longer the term the bigger the bet.

A savings rate is variable, and the bank can cut it the week after you decide not to bother. A CD's rate is locked for the term, which is the thing the extra few dollars is really paying for.

The table at the bottom of the calculator prices that bet: it shows what the CD gains if your savings rate averages a quarter, a half or a full point below where it is today. If you think rates are rising instead, the same table shows the CD losing.

Where this fits

• Do: Money with a date on it

  A tax bill in April, a down payment next spring, a roof you are saving toward — where the date falls further out than the term.

• Do: A rate you want to hold on to

  If you think savings rates are heading down, the lock is the whole product, and the table above prices it.

• Don't: The emergency fund

  That money has to be reachable the same day, which rules out a CD whatever the rate.

• Don't: While a card balance is running

  Paying down a card at 22% beats any CD on the market by a distance the payoff calculator will show you in a sentence.

Early withdrawal is the real cost

Most CDs charge a penalty of some months' interest for cashing out early — often three months on a short term, six or twelve on a long one. A three-month penalty means that at three months you break even and walk away with nothing. Cash out before then and you leave with less than you started.

The calculator works out the first month at which cashing out, penalty and all, still beats having left the money in savings. When the penalty is as long as the term, that month is maturity: the money is genuinely locked, and it should not be money you might need.

Penalties are written into the disclosure, not the rate sheet, and banks word them differently — some charge against principal, some have a flat fee, some waive it in specific circumstances. Read that page before you commit the money.

What this doesn't do

Interest here is quoted as APY, which is what banks advertise and what makes two offers comparable — an APY already contains its own compounding. It assumes the CD pays at maturity, one deposit and no additions, and no tax: interest from both accounts is ordinary income, so tax does not change which one wins, only how much survives. Bump-up CDs, no-penalty CDs, callable CDs and promotional rates that revert all behave differently.