Apples to Apples

(A guide to comparing, from an educated perspective, the true rates on various products)

Before jumping to the next certificate special, know what you’ll earn. Your earnings will depend upon compounding. This simply means the interest you earn is consistently added to your principal; at which time, it begins earning interest too. 

Knowing this, let’s compare apples to apples:

Financial Institution #1 offers a 1-year rate of 5.10% APR.

Financial Institution #2 offers a 1-year rate of 5.15% APR. 

While FI#2 may be the quick choice, they compound semi-annually (twice a year); while FI#1 compounds daily. This means the daily earned interest is added to the principal. In other words, the interest is earning interest . . . and more often! 

So what’s the difference? 

The APY for FI#1 is 5.221% and 5.216% with FI#2. You earn more on a compounding basis with FI#1 despite a lower APR. And some FI’s don't compound at all. Suppose FI#3 offers the same rate as FI#2, but doesn't compound.

The difference is charted below:

(Assuming an original principal investment of $100,000)

Bottom line? Ask about compounding before deciding which CD is a sweeter deal.