Getting a good interest rate today can be tough. With bank’s offering the lowest interest rates, putting your money to work for you takes knowledge. Knowing banking terms like short-term interest rates, long-term interest rates, current CD rates, and the latest interest rates are essential in building money for your future. So, why do interest rates, or interest rate change occur — and why are they differ between different financial investments?

Interest Rates Finance Explained

Interest rates are made up of several components — which also explains interest rate change. Interest rates are what borrowers are charged when borrowing money. When you borrow money from a bank it’s called a loan. When the Bank gets money from you it’s called a financial investments. Typically, loans carry a higher interest rate. However, this article is to assist you in earning money from your investments. Therefore, we will only be covering interest rates as it pertains to short term and long term investments. One factor that determines the latest interest rate is the Prime, set by the Federal Reserve.

When you hear the Feds have dropped the interest rate, your interest account will be affected unless it is a locked (fixed) account — like a CD (Certificate of Deposit).

Interest Rate Financial Investments

Savings Accounts – A savings account usually pays the least amount of interest.   Savings account typically have very few restrictions and almost no risk. These factors, few restrictions and no risk are why the interest rates are so low.

Money Market Accounts – A money market account usually has a higher rate of return. The interest rate on money market accounts are higher because of the restrictions imposed on the account. Many money market accounts are restricted to 3 withdrawal per month. The bank rewards the stability of the funds by giving a higher interest rate. Money market account are risk free as well — at least the principle. Depending on what’s happening with the US economy and the Prime rate, interest rates on a money market account will vary.

Both the Savings Account and the Money Market Account are considered short term interest rate accounts.

CD (Certificates of Deposit) – A CD usually offers the highest interest rates. CDs can range between 30 day to 60 months. Typically, the long the term of the CD the higher the interest rate. As with the money market account, the bank rewards the stability of the funds you have invested. CDs are very restrictive but carry very little risk. CDs can be viewed as a long term interest rate account depending on its duration.

Current CD Interest Rate and A Plan To Earn More

Let’s take the CD and build a plan to earn $76.25 dollars in interest each month.

Currently, TD Banks have several CDs with interest rates over many of the best money market accounts. We will take the three highest interest rates with varying terms.

60 mo CD @ 3.0% Principle = $15,000
(Monthly Interest = $37.50)

18 mo CD @ 1.75% Principle = $5,000
(Monthly Interest = $14.58)

60 mo CD @ 3.0% Principle = $5,000
(Monthly Interest = $12.50)

9 mo CD @ 1.4% Principle = $10,000
(Monthly Interest = $11.67)

Total Monthly Interest = $76.25 (You can elected to have the interest earned rolled into another account or have it remain with the CD). If you elect to have the interest earned pay to another account, at the maturity date you will received your principal — because the interest was already paid throughout the CD duration).

So, why this plan. Because CDs have the most restrictions, it something was to come up — having your money locked away may cause you difficulty. I recommend having at least one years worth of expenses in a money market account. The remaining funds can be split amongst varying terms CDs. Another reason for using multiple CDs with varying terms are that the interest rate change over time. Sometimes to your benefit and sometimes not. By having varying terms CDs, if a better interest rate is available at the time of one of your CD maturity date — you will have the opportunity to roll some funds into a better interest rate CD.

For example — the 9 mo CD has matured. TD Bank is now offer 2.7% interest rate on a 18 mo CD. You can roll the $10,000 into that account.

Some people have come up with plan to live solely off the interest of their money. Even if this is not where you are right now in life, earning the highest interest rate on your money is a smart thing to do.

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