Why a CD Earns More Interest Than a Recurring Savings Plan at the Same Rate
A certificate of deposit (CD) locks in your full lump sum from the very first day, so the entire amount earns interest all the way to maturity. A recurring savings plan, on the other hand, adds money gradually in smaller deposits, so each individual deposit is only invested for part of the term. For a 12-month plan, your first deposit earns a full year of interest, but your last deposit earns barely a month's worth. As a result, even at the exact same stated rate, a recurring savings plan typically earns roughly half as much total interest as a CD. This calculator compares the after-tax returns of both options for the same target amount. That said, a recurring savings plan is still a great way to build the discipline of setting money aside every month, especially if you don't have a lump sum to deposit yet. If you already have the lump sum available, though, putting it into a CD is usually the more efficient choice. And remember: because the US doesn't apply a flat withholding tax on savings interest the way some countries do, your actual take-home return depends heavily on your own marginal tax bracket, so it's worth plugging in your real rate rather than a rough guess.
How It's Calculated
| Product | Pre-Tax Interest Formula |
|---|---|
| CD (Time Deposit) | Principal × Annual Rate × (Months/12) |
| Recurring Savings | Monthly Deposit × Annual Rate × Months×(Months+1)/2 ÷ 12 |
Frequently Asked Questions
Each deposit into a recurring savings plan is only invested for part of the term, so at the same rate the actual interest earned is lower than a CD.
Interest is reported on Form 1099-INT and taxed as ordinary income at your marginal rate, so enter your own combined federal and state rate.
Because deposits are only invested for part of the term, it can still earn less in dollar terms, so comparing after-tax totals is the only way to be sure.
※ This is a simplified comparison assuming an equal stated rate; actual rates and terms vary by bank and product.