Certificates of Deposit (CDs) are a popular way to save money. They offer higher interest rates than regular savings accounts. Understanding CD rates is key to getting the most from your investment. But where do you start?  Don’t worry: we’re happy to help.  In this guide we’ll explain CD rates and show you how to use CD rate calculators to find the best rates.

What are Certificates of Deposit (CDs)?

Certificates of Deposit (CDs) are special accounts that pay a fixed interest rate for a set period.1  When you open a CD, you agree to keep your money in the account for a certain time, from a few months to several years. The bank pays you interest, usually higher than a regular savings account. CDs typically offer higher interest rates because they require you to keep your money in the bank for a fixed term.  Savings accounts provide lower interest rates but allow you to access your money anytime without penalties. Some investors choose CDs for their higher returns, while others prefer savings accounts for their flexibility and easy access to funds.

Understanding CD Rates

CD rates are the annual percentage yield (APY) that banks pay on the money deposited in a CD. Several factors affect these rates.

One major influence is economic conditions.  The overall economic environment, including inflation rates and the Federal Reserve’s monetary policy, plays a critical role. CD rates tend to be higher when the economy is strong.

Longer-term CDs may offer higher interest rates since you are locking your money away for a longer period. However, there are times where longer-term CDs might have lower rates. This happens due to expectations of declining future interest rates.

Comparing CD rates with other interest rates is important. CD rates are usually higher than savings account rates but may be lower than the returns from stocks. However, CDs are less volatile than stocks and offer predictable returns.  This makes them a good option for conservative investors.

How to Use a CD Rate Calculator for Comparing Options

A CD rate calculator helps you compare two different CD options. You can specify the amount deposited, the rate, and the term for each option. The calculator shows how much interest you will earn over the full term and per month. Here’s how to use it:

  1. Input Initial Deposit for Both Options: Enter the amount you plan to invest in each CD. Compare different amounts to see how varying deposits affect your earnings.
    • Option 1: $10,000
    • Option 2: $10,000
  2. Enter the Interest Rate for Both Options: Input the APY offered by the bank for each CD term.
    • Option 1: 2.5%
    • Option 2: 3.0%
  3. Select Term Length for Both Options: Choose the term length of the CDs. Common options include 3-month, 6-month, 7-month, 11-month, 12-month, and 18-month CDs.
    • Option 1: 12 months
    • Option 2: 18 months
  4. Calculate: The CD rate calculator will display:
    • Total Interest Earned: The amount of interest earned over the full term for each option.
    • Monthly Interest: The interest earned per month for each option.

Example Calculation:

  • Option 1:
    • Initial Deposit: $10,000
    • Interest Rate: 2.5%
    • Term: 12 months
    • Total Interest Earned: $250
    • Monthly Interest: $20.83
  • Option 2:
    • Initial Deposit: $10,000
    • Interest Rate: 3.0%
    • Term: 18 months
    • Total Interest Earned: $450
    • Monthly Interest: $25.00

By comparing these results, you can see that Option 2 offers higher total and monthly interest due to its longer term and higher rate.

Using a CD rate calculator to compare different options helps you find which CD gives the best return on your investment based on your financial goals.

Conclusion

Understanding CD rates and using a CD rate calculator to compare options is important for anyone investing in CDs. Knowing what affects CD rates and using calculators can help you find the best rates and make the most of your investment. Visit our Certificates of Deposit page for more info.  Check the latest CD rates, compare terms, and try easy-to-use calculators to plan your investment future.

Footnotes:

1 Bump-up CDs and Step-up CDs allow you to change terms, but fewer financial institutions offer them.  They are not included in our CD rate calculator tool.