Interest is the fee charged when money is lent out to a borrower.
Interest rate is the percentage of the total borrowed amount at which
the fee is determined.
When you deposit your money in an account, you are lending funds to
the bank to finance its operations. Hence, they must pay you interest
on the deposited balance.
Simple vs Compound Interest
The interest you earn on your checking or savings account deposit can either be simple or compounded.
Simple interest is calculated only on the original deposit. You earn interest only on the principal.
Compound interest is calculated on the initial deposit, plus all accumulated interest. Think of it as earning interest on interest.
The Power of Compounding
Interest is a powerful tool in the world of personal finance. Once you master sound financial habits like budgeting, frequent contributions into a high yield account can create tremendous long-term wealth.
The snowball effect of compounding means that the more interest that is added to your balance, the faster your savings grows, even if the amount is too small to seem important.
APY vs Interest Rate Explained
APY, or Annual Percentage Yield, is the effective rate of return on a deposit after you account for compounding. Interest Rates do not account for daily, weekly, or monthly compounding and so the real yield you earn on a deposit, or APY, maybe slightly higher than the advertised Interest Rate.
Is Interest Income Taxed?
Yes, interest earned on a checking or savings account deposit is considered as income and is taxable under the regular brackets.
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