After hearing that Vanguard offers [placed] CD’s on Clark’s podcast, I read a little about them. Five year CD’s are available at a rate of 5%. However, in looking at the fine print, I read that they pay simple interest, not compound interest. I also read that the interest is credited at various times- monthly, quarterly, semi-annually, yearly, etc., based on the terms of the offering bank. Would I be better off investing in a CD with a lower rate that compounds frequently, then? If so, what is the lowest compounded interest rate that would outperform a 5% CD with simple interest?
I think if you ran the numbers on how simple interest compares to compounding interest you would find that the difference of net yields is not much unless you carry the investment timeframe out many years. General rule is that the higher the interest rate, the more you miss out with simple interest vs. compound interest which is sort of obvious I guess
Try using this site:
You can enter decimal interest rates up to 3 decimal places -ie- 4.999%
The site looks like it uses monthly compounding based on what I could tell.
Very interesting. Thank you!
Jane, the problem with considering any money put into CDs as a savings, or investment, is that the VALUE of the dollars put in will be worth less than the dollars taken out, due to our national high inflation rate. (Sure you will receive more dollars, but they will buy less than they would have the year before.) CDs return will never equal or exceed the current inflation rate, due to runaway government spending of printed dollars. You need to diversify into stocks to have any chance of earning enough gain to exceed the real inflation rate (not the government-computed 2% bogus rate).