Interest Rates: Whats the Deal?

Its almost impossible to get through a single discussion about finances without hearing the phrase interest rates. Anyone who has a bank account is concerned with interest rates. How high they are, how high they might go, what to do when theyre too low. What is the deal with interest rates and the financial umbrella they cast?

You cant even deal with a bank these days without seeing signs and hearing talk of the all-important interest rates. Its not your money, nor your actions that determine what your investment or bank account will do. No, all of that depends on these interest rates that rule any banking investment.

Your whole investment, or the whole amount of money you have in an account, accrues interest. This interest is going to be a percentage, and every year you will get that percentage of the money you have in your whole account. The percentage is the interest rate, and the amount of money that is the account to be subject to interest is up to you. The higher the rate, the more you stand to gain.

Are interest rates always the same? No, and thats why theyre so confusing! Some accounts and investments, like CDs and savings accounts, offer a fixed interest rate. This means that, no matter what the financial market does, you interest rate does not change. For these fixed rates, you will usually get a lower fixed rate than whats considered the average interest rate of the day anything from 2% to 5%. There is a certain security to having a fixed interest rate, because you know it wont drop below a certain point, but you will always be locked into what most consider to be a slightly lower rate than other types of investments.

And, thats where variable interest rates factor in. Other accounts and investments, like annuities, let you enjoy a variable interest rate. True to the name, these rates flux in tandem with the changing financial market. If general interest rates are high, your variable rate will reflect this and youll enjoy large returns. If rates are low, yours will be low also. These changeable rates appeal to some investors because of high-gain potential, but remember if interest rates lower then youll make less from your investment.

Interest rates cause even more confusion by changing from place to place. Not all banking institutions offer the same interest rates, and all are in direct competition with each other. This makes investing in banks a buyers market. Theyre competing for your money, so its wise to shop around and see whos offering the best deal for your needs. Call banks and find out what specials theyre offering, and what their current interest rates are. This is your best bet for finding the highest interest rate, and creating the account or investment that best suits your personal needs.