please ACTUALLY explain this like im 5 i genuinely cannot grasp this concept whatsoever. i’m opening a savings account and it says;
“The interest rate depends on your account balance. All rates are variable. 4.25% p.a. on balances less than $50,000. 4.25% p.a. on balances between $50,000 – $249,999.”
am i paying for my own savings account???? what??????? i am so confused i feel like im going crazy
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In the context of savings account, it’s the interest the bank pays you, since they’re the ones borrowing the money from you
No, in a savings account the bank is paying YOU money for keeping your money in their bank (which then then use to give out loans to people, which is how banks make their money.)
And based on both numbers being 4.25% for the two different brackets, it seems like you bank has a set up where they could offer two different interest rates based on the money in your account, but are currently choosing to just keep it to one rate.
Now for that “All rates are variable” part, that just means In the future the bank could lower or raise them. Like if the bank started struggling financially they could lower the interest rate they’re paying you from 4.25% to 1% so they aren’t paying out as much money.
When you deposit money at a bank, the bank will use your money to lend out to other people. Because of this, the ban will pay you to use your money. This is called interest, and it represents the time value of money. Money can be invested to earn money over time and this is why there is a time value of money.
Because the bank is borrowing your money, they are paying you interest to use it. The rate they pay you is the interest rate. There are different types of interest, including simple interest and compounding interest. Simple interest is when you earn interest on an amount of money, while compounding interest is when you earn interest on that amount of money plus any interest you’ve earned on that amount, so compounding interest is better for you. Also, the interest rate is usually based over a certain amount of time and for savings accounts, it is usually annually.
So, in your case, if you deposit $1000, you will earn $42.50 on it per year, which will usually be broken up to be paid monthly. If you have simple interest, you will earn the same amount each year so long as you do not change the original amount. With compounding interest, you will earn interest on the original amount plus any interest you have earned, so you will earn more this way.
Watch out if you are borrowing money, though, since you will have to pay interest on anything you borrow and it’s usually much more expensive!
The interest rate on a savings account is money the bank is *paying to you* for you having money in the account, because they use that money to give loans to other people or make investments.
In your example, p.a. means “per annum” or “per year”. That means that if you put $100 in the account and it earns 4.25% *per year*, then you would expect to have $104.25 in the account after your money sat there for a year. It is usually a little more complicated than that, though, because they usually pay you your interest each month (4.25% is for *one year*, but if it is paid monthly then it is 4.25 / 12), which means you will have a few cents more than $104.25 in your account at the end of the year if you just put that $100 in and don’t touch it.
“All rates are variable” means the rate can change – even though the rate *right now* is 4.25%, tomorrow it might be 4.27%, or 4.20% or 3.5%.
You have 100 cookies. I (the bank) tell you I will keep your cookies safe, so you give them to me and can take them back any time you want. Every three months I will add 1 cookie to your cookie fund, as 1% interest compounded quarterly. Compounding just means basing the interest rate from the original amount plus the amount of the previous interest. So the next month it will be 1.01 cookies added to your cookie fund.
The purpose of interest is to encourage more people to put money in the bank, as banks then loan out that money and get more in return, allowing them to make a profit. Hope this helps.
Interest goes to the person providing the money. In the case of a savings account YOU are providing the money , so thats what the bank is paying to YOU.
If you have an interest rate of 10%
And you have 100 money in your saving account
Then regularly (every month, or every year), you will get money equal to 10% of the money in your account.
So first time you get 10% of 100 which is 10. You now have 110.
Then 10% of 110 which is 11. You know have 121.
Then 10% of 121, et caetera, et caetera,…
Interest is money earned (and/or owed) based on a given amount.
Lets keep things simple at $100, and something like 2% interest.
If the interest is calculated over a year, then when you go to it next year, the account would have $102 in it.
This works for debts, as well, but it’s figured out the same way – if you owe a debt collector $100, and they operate on 2% interest yearly, then if you keep not paying them, you’ll owe them $102 after a year.
We can scale that up and around with different numbers – for $50,000 and 4.25% yearly interest, then after a year, the account would be valued at $52,125. The $2125 is the 4.25% yearly interest that you earned just for keeping your money in that bank.
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It’s not uncommon for banks to charge an account maintenance fee – this varies by bank, and you’ll need to ask your bank about their policies about maintenance fees.
For a lot of them, the maintenance fee is only for accounts that don’t have much money in them (less than $1000-1500), or don’t have much activity (you only use it once or twice a year), and it’ll usually amount to about a $15 monthly fee to keep the account open. As said, for specifics on it, you’d need to talk to your bank specifically, because they might have maintenance fees for *all* accounts, or they might have a maintenance-fee-free account type that you can open instead.
The maintenance fees here are not usually part of or based on the amount of money in the account (as interest would be) – if your account only has $100 in it, they’re likely going to charge you the same $15-ish maintenance fee as if you had $500 in it.
It’s the amount of money paid for using somebody else’s money. If you borrow money to buy a house or car, you pay interest on the money borrowed. If you open a savings account and that allows the bank to lend out your money, they pay you interest on your savings. So in your case, a bank pays you 4.25% on your savings account balance and then the bank in turn lends money deposited into it for car loans or home mortgages at, say, 7% and the 2.75% spread is their revenue.
tl;dr: The interest is money the *bank* is giving *to you*, as an incentive to keep your money with them.
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The bank wants you to keep your money with them.
To incentivise you, they pay you a small amount every month. This is interest. If your interest rate is 1% a year, then if you have $2000 at the start of the period, you have $2020 at the end of the period: you have been paid money by the bank!
Why would they give you money? The reason is that when people put their money in a bank, the bank doesn’t just have it sat in a pile. They take your money and *spend it* – specifically, they invest it in stuff that then generates more money. So the interest they give you is a small part of what they earn by investing your money behind the scenes.
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