One great thing about putting your money in a certificate of deposit, or a CD, is that it grows with interest — and at rates generally higher than those on savings accounts. This is because, unlike savings accounts, CDs require you to commit to keeping your money in that CD for a specific amount of time. Typically there’s a penalty if you withdraw it before the CD matures.
This can sound strict, but CDs can be more flexible than you think. Some banks allow you to withdraw the interest you earn from a CD before it matures. Here’s how that works.
Typically, when you open the CD with a bank that offers interest payouts, you can choose whether you want the interest you earn to stay in the CD or to be paid out in disbursements.
Different banks have different rules about if, and how often, you can receive interest payments. Some banks let you choose to get payouts monthly, quarterly, semiannually or annually.
If you choose to get interest payouts, you may be able to transfer the money from your CD to a savings account or another bank account.
Usually, the interest that you earn on your CD is added to your CD balance.
APY, or annual percentage yield, is how much interest you’ll earn in a year, assuming you don’t withdraw funds during that year. Here’s what the math looks like:
In January of 2018, let’s say you put $10,000 in a CD with a 2.50% APY. Then let’s assume it compounded monthly.
By the end of January, you’ll have earned $20.58 in interest, bringing your total balance to $10,020.58.
Now, let’s turn the page to February. Assuming you didn’t withdraw any money you’re now starting the month with a higher balance.
That means you’ll earn a little more in interest ($20.62) in February, bringing your new total balance to $10,041.20.
Phew. Easy, right?
If you have a CD that lets you withdraw interest, you have a few options:
You can keep the money in the account and keep growing the funds there. You make the most out of compound interest that way.
You can transfer out the interest, but you would lose the benefit of compounding interest because your balance stays the same.
Withdrawing just the interest from a CD is a way to earn a little extra money without touching the principal. For some people, that’s the best of both worlds. You can grow your money with CD rates, which are generally higher than interest rates on savings accounts, and get regular interest payouts if that’s an option with the bank.