Money Market Interest Rates

From the amount of debt Americans have today, itís obvious that people like to spend money. Whatís better than spending money however is saving money. Unfortunately, most people donít save, and if they do, they donít understand about savings account interest rates.

To understand saving money, one needs to understand interest rates, how the rates differ, how they are figured, and how they can benefit the saver. If people realized the potential of saving, even a little, each week, there might be more savers than non-savers.

One way to determine interest is with Simple Interest, and it is just that, the simplest type of interest to calculate. It is calculated as I = P r t† or† Interest ( I ) = Principal ( p ) times the Rate ( r ) times Time ( t ) periods.† If you invest $100 at 5% interest for a year, the calculation would be $5 = $100 x 5% x 1 yr. So, for a year at 5% interest, you would gain $5 interest on $100.

Banks generally donít pay simple interest, although that may be the initial interest payment since compounding hasnít begun. Most banks will use compounding rather than simple interest. They also use annual percentage yield to figure interest. (Check around to see which bank offers the highest APY.)

The annual percentage yield (APY) is how banks determine how much interest a person earns in a given time period. The higher the APY, the more money you will receive for leaving money in that institution. The APY is the amount of yield you earn on any money deposited over a yearís time. This is how much money youíre making for maintaining this financial relationship.

It is rare for a bank to pay out interest on a monthly basis any longer, but will usually pay quarterly. Suppose you opened a savings account with $1,000. Each week you saved $50. At the end of the quarter (three months), you would have $1,600 of your own money in the account. The bank would figure the interest based on and pay interest on that $1,600. If the interest rate were 5.3%, you would receive an additional $84.90 automatically deposited into your account. Maintaining this rate of deposit and interest, you would have $4,408.28 in your account at the end of the year.

The calculation for figuring the APY is:†† APY = (1 + r/n)n -1 where r is the stated annual interest rate and n is the number of times it is compounded each year. This is also called the Effective Annual Rate (EAR) calculation, if youíre in finance.

All of the mathematical calculations aside, you can save with confidence if you find the highest APY and choose to save at that institution. With a little work, it is possible to understand savings account interest rates. Just remember, the higher the APY, the more money youíll earn in the long run. And isnít that why youíre saving in the first place?



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