How do I Calculate Yearly Deposit Amounts Based on the Total Amount of a Certificate of Deposit?
Certificates of deposit offer fixed interest rates for a specified period of time, which allows you to know exactly how much it will be worth when the CD matures. Many CDs allow you to add money to the CD during the term, so you could lock in a rate for the next few years and then add a specific amount each year to reach your savings goal. To figure the annual contribution, you need to know the annual interest rate and how many years you're going to be making deposits.
Divide the annual interest rate on the CD by 100 to convert to a decimal. For example, if your CD pays an annual rate of 4.3 percent, divide 4.3 by 100 to get 0.043.Step 2
Add 1 to the interest rate as a decimal. In this example, add 1 to 0.043 to get 1.043.Step 3
Raise the result to the power of the number of years before the CD matures. For example, if you plan to take your money out at the end of five years, raise 1.043 to the fifth power to get 1.234302311.Step 4
Subtract 1 from the result. In this example, subtract 1 from 1.234302311 to get 0.234302311.Step 5
Divide the annual interest rate as a decimal by the result. In this example, divide 0.043 by 0.234302311 to get 0.183523585.Step 6
Multiply the result by the amount you want your CD to be worth at maturity to find the amount you need to contribute each year. Finishing the example, if you want your CD to be worth $10,000 at the end of five years, you need to contribute $1,835.24 each year.
- Banks charge large penalties for taking out money before the CD matures, so make sure you won't need the money early before investing.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."