How Does Savings Account Interest Work? — Transcript

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1. 0:00so what is interest put simply it's the
2. 0:05cost of borrowing something in this case
3. 0:07money so depending on who's doing the
4. 0:10lending one who's doing the borrowing
5. 0:12you may be a feign interest more earning
6. 0:17interest when you deposit your cash into
7. 0:20a bank they pay you interest or
8. 0:22borrowing your money all banks tell you
9. 0:26the interest rate you'll earn as an
10. 0:27annual percentage yield or APY
11. 0:30this rate matters even for products like
12. 0:33savings accounts because rates can vary
13. 0:35significantly across banks some savings
14. 0:40account interest rates are as low as one
15. 0:42hundredth of a percent while others are
16. 0:45as high as one percent say you had a
17. 0:48five thousand dollar balance in your
18. 0:50account the difference between a
19. 0:52hundredth of a percent and 1% is $0.50
20. 0:55in interest versus fifty dollars and
21. 0:57twenty three cents over the course of a
22. 0:59year but how do banks calculate this
23. 1:02interest let's assume you keep that same
24. 1:05$5,000 in your savings account and the
25. 1:08bank pays 1% a py at the end of the
26. 1:12first month you would earn 4 dollars and
27. 1:1617 cents and interest which is then
28. 1:19added to the balance of your savings
29. 1:20account you continue to earn interest on
30. 1:23your balance and as your balance grows
31. 1:25each month so does your monthly interest
32. 1:28this is called compounding interest at
33. 1:32the end of the year if you add up all
34. 1:34your monthly interest payments you will
35. 1:37have earned $50 and 23 cents to learn
36. 1:41about how much you could earn an
37. 1:42interest with a savings account click
38. 1:44here Discover Bank remember FDIC
39. 1:48you