Calculating CD Interest Rates

how to calculate the best cd rates

Since women have to save money for all the stuff they buy, its good financial savvy to learn about CD’s. Today’s guest post teaches you how to shop for the best rates.

One of the most popular ways to earn interest on your money over time is by investing in a certificate of deposit, or CD. Since CDs are available in both short- and long-term varieties, they are perfect for saving and earning interest for retirement, college, large appliances, vacations, and any other large purchase.

The key to earning good money from the investment is to find the highest CD rates that are available.

Understanding CD interest rates

Your financial institution and the Federal Reserve set interest rates. The Federal Reserve actually dictates base interest rates overall. Your financial institution has the right to offer a variance of the rate based upon its own desired profit.

For instance, if you invest in a short-term low investment CD, your interest rate will be low. A long-term high investment CD equals a higher interest rate, hence a better return. The reason is because the financial institution also earns interest from your investment by loaning money. Larger sums for a longer period earn the institution more, so they offer you the highest CD rates.

The CD interest rate usually stays the same throughout the pre-determined length of the term, though some do offer variable rates. Most CDs pay compound interest, meaning the interest you earn each day compounds on the amount earned the previous day. Most terms last between three months and five years. Remember, the longer you tie-up your money, the higher the rate you will be offered.

What the terms and conditions mean

The biggest drawback of CDs is that you can’t easily access the money until the CD matures. In order to guarantee you the highest CD rates, the financial institution does not allow you to withdraw what you invest or earn until the CD reaches the end of its term. If you withdraw before then, you will be subject to penalty fees, which vary based on the provider. Some institutions now have CDs with lower interest rates that do allow withdrawals up to a certain percentage of the CD amount.

CDs are only available on one condition; you must have the minimum amount to invest. Some start as low as $100, while others require thousands. You must have the full amount required in order to open a CD. Check to see whether further deposits during the CD term are allowed or not.

How CD interest rates affect you

If you want to earn a higher return on your investment, wait to open a CD when interest rates are higher. Choose a fixed rate CD to ensure you keep the highest CD rates possible throughout the investment period. Interest rates determine exactly how much you will earn during the CDs term.

If you are looking to save for a major purchase within the next six months or several years, you will want to earn as much interest as possible. You have the option to reinvest in the same CD or withdraw your money when the CD matures. If another financial institution offers a higher interest rate at this time, switch to the new provider to earn more. Check all the terms and conditions carefully before switching.

Photo courtesy Images of Money

About the author

Kennedi Rose

1comment

Leave a comment: