The Basics of Earning Interest

    Published: 06-16-2009
    Views: 12,995
    A Wells Fargo representative explains the basics of interest that you earn on savings accounts and other financial accounts.

    Beverly Butler: Hi! I'm Beverly with Wells Fargo & Company. Today we're discussing the basics of interest that you earn on savings accounts and other financial accounts. Saving is the first step of good money management.

    The amount of interest you earn depends on the interest rate, how long you keep the money in the account and how the financial institution pays interest. You should consider the Annual Percentage Yield or (APY) of the accounts.

    The APY is the rate of return for a one year period. The higher the APY percentage the more interest you'll receive. There are two basic types of interest, Simple and Compound.

    If an account pays what's called Simple Interest you only earn interest on the principle. The amount of money you originally deposited. With Compound Interest you earn interest on your original deposit plus you earn interest on the interest your account has earned over time.

    Compound Interest is now typically paid at most banks and financial institutions, but there are differences in how frequently your money is compounded. How important is Compound Interest? Albert Einstein is quoted as saying "compound interest is the greatest mathematical discovery of all time.

    " There's no doubt that compounding is a powerful way to make your money grow faster almost all banks Compound Interest.

    When you're out shopping for a savings account, here's a quick way to determine which account will pay you the most. Just compare the annual percentage yield of the accounts. The higher the APY, the more interest you'll receive.

    With Compound Interest your money grows a lot faster. Depending on the account, interest may be compounded daily, monthly or quarterly. Each time you're paid interest on the new total amount in the account. The more frequently your money is compounded, the more interest you'll earn.

    The final factor in determining how much money you earn is time or how long you keep the money in the account. The more time your money has to grow that better.