How Do I Calculate Certificate of Deposit Interest Rates?

Certificate of deposit interest rates are a source of great confusion for many people. Acronyms like APR and APY confuse people greatly. Luckily, there are many resources available to you online. It is also very easy to calculate on your own.

First, let's look at what a certificate of deposit is: One of the ways that a bank makes money is to invest. They can invest in a variety of financial instruments but regardless of what instrument they use, they all need one thing: money. Banks are required to keep a certain amount of uninvested money on hand at all times so they often go to other sources for money to invest.

One of those places is you and I. They use our money to make money for themselves but if they rely on the money we deposit in to our checking and savings accounts, there is no guarantee that we won't take it out tomorrow.

This is where a certificate of deposit enters in to the picture. When you agree to let the bank have your money for a predetermined amount of time, they can invest that money and make a profit. In exchange for the use of your money, they pay you interest. The interest rate is higher than a savings account. Certificate of deposit interest rates are almost always at least one point higher than a savings account.

The best way to think of these interest rates is in terms of one year. If the APR or Annual Percentage Rate is 2%, you are earning 2% on the money that you have in that CD. If you have a $10,000, 1 year Certificate of deposit with a 2% APR, you are making $200 for the year.

The best way to figure this out is to simply Google "CD APR Calculator." This will bring up entries for online calculators where you can enter the figures in to it and it will tell you how much money you will make.

Don't forget that your bank or credit union will also be happy to calculate this for you.

Before investing in a certificate of deposit, click here to see why you need to be careful.

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