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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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!
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