How a $500 5‑Year CD Grows and What It Means for Your Money

Quick Takeaways

• A $500 investment in a typical 5‑year CD at 4.25% APY ends up around $618 before tax.
• Interest compounds monthly or daily, which adds a few extra dollars compared to simple interest.
• FDIC insurance protects the full amount, but early withdrawal penalties can eat up earnings.
• If inflation averages 3% per year, the real purchasing power of $618 is about $537 in today’s dollars.
• CDs beat regular savings accounts but usually lag behind stocks and real‑estate over long horizons.

Putting $500 in a Certificate of Deposit (often shortened to CD) sounds simple, but the numbers behind it tell a story. Over five years, that modest sum can turn into a tidy nest‑egg… or it can lose value when inflation runs high. This guide walks you through the math, the tax side‑effects, and the hidden costs so you know exactly what happens to your money.

What a Certificate of Deposit Actually Is

A certificate of deposit is a time‑bound deposit offered by a bank or credit union. You lock in a fixed interest rate for a set period-called the maturity. The bank pays you interest, usually compounded daily or monthly, and returns the principal at the end of the term.

Because the rate is locked, CDs are low‑risk: you know exactly how much you’ll earn if you hold to maturity. The trade‑off is limited liquidity; pulling out early typically triggers a penalty measured in months of interest.

Crunching the Numbers: $500 Over 5 Years

To see what happens, we need a realistic rate. As of October2025, major Australian banks offer around 4.25%APY for a five‑year CD (the Australian equivalent is a term deposit). APY-Annual Percentage Yield-already assumes compounding, so it’s the most user‑friendly figure.

Using the compound‑interest formula:

Future Value = Principal × (1 + r/n)^(n×t)

• Principal = $500
• r = 0.0425 (4.25% as a decimal)
• n = 12 (monthly compounding, typical for Australian term deposits)
• t = 5 years

Plugging in the numbers yields:

$500 × (1 + 0.0425/12)^(12×5) ≈ $618.23

So, before tax, your $500 becomes roughly $618 after five years. That’s a $118 gain, or a 23.6% total return.

Taxes and Insurance: Keeping Your Money Safe

In Australia, interest earned on a term deposit is taxable as ordinary income. Assuming a marginal tax rate of 32.5% (common for many earners), the after‑tax amount drops to:

$618.23 × (1 - 0.325) ≈ $418.50

Whoa, that looks worse, but remember the $500 principal is still there; you just keep $418.50 of the interest after tax, ending with $918.50 total cash.

On the safety side, the FDIC equivalent in Australia is the Australian Government’s Financial Claims Scheme. It guarantees up to AU$250,000 per institution, so your $500 is fully protected.

Inflation: The Silent Eroder

If inflation averages 3% per year over the same period, the purchasing power of your future $618 shrinks. Adjusting for inflation:

Real Value = Nominal Value / (1 + i)^t
Real Value = $618 / (1 + 0.03)^5 ≈ $537

In today’s dollars, you’ve only gained about $37 in real terms after five years. That’s why many savers compare CD returns to the inflation rate-they want a positive real yield.

How Does a CD Stack Up Against Other Low‑Risk Options?

Below is a quick side‑by‑side look at common low‑risk places you could park $500 for five years.

CDs usually beat regular savings accounts on raw yield, but they sit behind many bond or money‑market options that also offer modest liquidity.

Choosing the Right CD and Avoiding Common Pitfalls

• Shop around for the best APY. Even a 0.25% difference adds up over five years.
• Check the penalty structure. Some banks charge a flat fee; others forfeit a few months’ interest.
• Make sure the institution is covered by the Financial Claims Scheme.
• Consider laddering: split $500 into two CDs (e.g., 2‑year and 5‑year) to keep some funds accessible.
• Watch your tax bracket. If you expect a higher income later, the interest might be taxed at a higher rate.

Step‑by‑Step Checklist to Open a 5‑Year CD

1. Identify banks or credit unions offering the highest interest rate for a 5‑year term.
2. Confirm the account is fully insured by the Financial Claims Scheme.
3. Gather required documents: ID, proof of address, and your $500 deposit (or set up an electronic transfer).
4. Read the fine print on early‑withdrawal penalties and any minimum‑balance rules.
5. Open the CD online or in‑branch, specifying the $500 principal and the 5‑year term.
6. Set up automatic interest reinvestment if you want compounding to stay within the CD.
7. Mark the maturity date on your calendar and decide in advance whether you’ll roll over or withdraw.

Follow these steps and you’ll avoid surprise fees while locking in that nice, steady return.