If you contribute $100 a month, you’d have $2,219.28 after 12 months.īonus tip: For years, earning much money on savings was pretty much impossible. So let’s say you put $1,000 into a savings account with an APY of 1.20% that compounds daily - and then you contribute $25 a month for the next 12 months.Īfter a year, the balance in the account would be $1,313.87. APY: Annual percentage yieldĪnnual percentage yield (APY) refers to the money you earn on a deposit over a year - taking into account compound interest. RELATED: How to avoid a bank ‘protection’ fee that costs consumers $11 billion a year 3. That way, you never have to pay any interest on the money you charge to the card. However, you don’t even need to worry about the APR if you use your credit cards responsibly - meaning you pay off the balance in full, down to $0.00, every month before the due date. So if the monthly rate is 2% - 2% x 12 months = 24%. It gives consumers a way to compare offers from various lenders.Ī credit card company may also advertise its rates based on a monthly basis, which just gives you a breakdown of the APR. Your credit card has an annual percentage rate (APR) - which is essentially the price you pay to borrow money from the bank to charge purchases on the card.Ĭredit card companies are required to clearly state the interest rate as a yearly rate before customers sign an agreement, and that’s where the term APR comes in. That $50 is added to the principal amount of your investment, and then next year, you earn a 5% gain on $1,050, so you earn $102.50. Here’s a simple example: You invest $1,000 today and earn an annual 5% gain, so $50. Then over time, as more interest is added that chunk of money (that’s already been growing from added interest) it continues to grow by bigger amounts. ![]() For example, when you invest money into a savings account, the money earns interest, which is added to the principal sum (the total chunk of money in the account). How it affects your savingsĬompound interest is an extremely powerful force that allows investors to earn exponentially larger gains on their money over time. But if you put that $100 into a savings account or other type of investment account, it will start to earn interest, and that $100 will grow into a much bigger sum of money as interest is applied to the larger, total amount over time. If you have $100 and do nothing with it, the value of that money will decline as time goes by. The time value of money assumes a dollar now is worth more than a dollar in the future, because of variables such as interest rates and inflation. One of the most important things to understand about money is that a dollar today is worth more than a dollar tomorrow. That is what allows your money to grow exponentially over time. As that total sum increases, interest is then added to the total sum + previously earned interest. When interest is added to the principal (original amount), that total sum increases. So as the total amount grows, so does the amount of interest that’s added to it - allowing your total sum of money to increase exponentially over time.Ĭompound interest is the addition of interest that’s added to the original deposit (investment) or loan amount. Compound interestįirst, you need to understand compounding - this is the process in which the value of an investment (the money you invest or put into a savings account) increases over time.Ĭompounding is what allows your money to grow exponentially - as the original amount of money you invest earns interest, the total amount increases (original + earned interest), and then that bigger sum of money earns more interest - and so on. 11 banking terms that impact your money 1. So instead of trying to interpret the banking world’s complicated definitions, we’ve put together a cheat sheet of some of the key terms and phrases that you need to know. In fact, it can be really confusing - especially considering the fact that banks aren’t the best at communicating certain things - like all the fees you’re paying and which services you can opt out of in order to save.īut with a little guidance and the right information, you can get a good understanding of this crucial aspect of your financial life - and ultimately, that will allow you to decide whether it’s time to find a new bank that better fits your needs. Personal banking isn’t one of the more intuitive parts of life. ![]() ![]() To support our work, we do make money from some links to companies and deals on our site. ![]() Disclosure: Team Clark is adamant that we will never write content influenced by or paid for by an advertiser.
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