Bank accounts and Certificate of Deposits (CD’s) are very
safe because the federal government insures them, usually up to
$100,000. However, they normally pay relatively lower interest
rates than bonds do. Also, sometimes bank accounts and CD’s
cannot make enough money to stay ahead of inflation. CD’s
usually pay a higher interest rate than bank accounts. But bank
accounts are usually accessible while CD’s have a time period
with a penalty for early withdrawal. CD’s have a fixed rate,
but the rate goes up as the length of time increases. For example,
a 2-year CD may pay 5% interest while a 3-month CD pays 4%
Let’s review the math of putting money in bank accounts and
I = P ´ r ´ t
I = interest
P = principal or present value (PV)
r = rate of interest (decimal)
t = time
Susan put $1,000 in a bank account at a 3% interest rate for 1
year. How much money from interest will she make in 1 year?
I = P ´ r ´ t
I = 1,000 ´ 0.03 ´ 1
I = 30 ´ 1
I = $30
Susan made $30 from interest in 1 year.
However, if inflation is 3.5% while Susan’s bank account
is still giving her a 3% interest rate, Susan is losing 0.5%
purchasing power this year. By putting money in a bank account,
Susan loses $5 because of inflation.
Bob put $1,000 into CD’s at a 5% interest rate for 1 year.
How much money will he make from interest in 1 year?
Estimate the answer:
Between $30 and $60