Does Your CD Offer This Feature That Maximizes Your Returns?

When you're shopping for a certificate of deposit (CD), there's a lot to consider. You want the best possible rate. And you need to make sure that the CD term is one that you're comfortable locking up your money for.

But there's another feature to look for, as well. Unfortunately, many people don't really know or understand this particular one, so it's often overlooked. 

After reading this article, though, you won't be one of those people. 

Look for a CD that offers daily compounding

When you're shopping for a CD, look for one that compounds interest daily. 

This means that when you earn interest on your invested funds, the interest is added onto your balance at the end of the day. So, for example, if you had $1 invested and earned $0.01 in interest that day, at the end of the day you would have $1.01 invested.

With daily compounding, on day two, you earn interest on that slightly higher balance. And the same is true on days three, four, five, and so on. Every day, your balance gets a little bigger, you earn returns on the returns that compounded, and you make money a little faster. 

Why it pays to look for a CD with daily compounding

Different CDs have different compounding schedules. Some might compound interest monthly, quarterly, or even annually. If they do, then you won't get that daily boost. So, the actual amount the CD earns you ends up being a little lower.

For example, let's say you had $5,000 and were choosing between three CDs that paid 3.75% over five years (several of The Motley Fool's Ascent's picks for 5-year CDs offer this rate). But what if one of the CDs you looked at compounded daily, the other compounded monthly, and the other compounded annually? 

• The CD that compounds daily would be worth $6,031.09 after five years.
• The CD that compounds monthly would be worth $6,029.39
• The CD that compounds annually would be worth $6,010.50.

The differences aren't huge in your returns. But with anything other than daily compounding, you're leaving money on the table. And there's no reason to do that if you're deciding between two CDs that appear to offer equal rates, but have different compounding schedules. 

Ultimately, your goal with investing in a CD is to maximize your returns. Since daily compounding is a feature that does that, add it to your list of things to compare when you're making your CD purchase. 

Barclays' CDs all compound daily and competitive rates are available on CD terms ranging from six to 60 months. Check them out to see if any are a fit. If not, check out our list of the best CD offerings to find one that compounds daily and offers the other features you're looking for.