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# What is interest and how does it work?

Learn about the basic idea of interest and why it is a good thing for saving.

## Introduction

Any time you save money you have different methods of doing it. You can save all loose change in a jar, or you can transfer money into some sort of a saving account. The main difference between these two choices is that the amount of money in the jar will never increase on its own, while money in a savings account will. That increase is called interest.

## What is interest?

Interest is like a reward the bank gives you for trusting them to look after your money. The more money you have in your account, and the longer you keep it there, the more interest you can earn.

## How does interest work?

The bank calculates interest as a percentage of the total amount in a bank account. For example, if the bank pays $1\mathrm{%}$ interest, that means you'll earn $\mathrm{}1$ for every $\mathrm{}100$ in your account over the course of a year. If there is $\mathrm{}500$ in your account, then you will earn $\mathrm{}5$ in interest over a year.
It may not seem like a lot, but the great thing about interest is that it builds on itself. For example, if you start with $\mathrm{}500$ in your account and you earn $\mathrm{}5$ in interest over the course of a year, you now have $\mathrm{}505$ in your account. The next year, the bank will calculate your interest based on that new, higher amount. The interest you gain each year will continue to grow.
And if you keep adding more money to your account on top of that, your interest will grow even faster. While it's not a get-rich-quick scheme, earning interest is a great way to grow your money over time.

## Want to join the conversation?

• Can the interest rate be negative? And if it is, does it mean the money will lose value?
• Interest rates in Japan, for instance, have been negative for several years. The Central Bank there wants people to spend or invest their money, for the good of the economy, so had to move to negative interest rates to discourage saving.
• interest is mid imo
• Usually, banks show an APY (Annual Percentage Yield) on their website, which tells customers how much interest they can get by having an account with the financial institution.

Banks provide a wide range of interest rates, but most range between 0.05% and 5%, partly affected by inflation. If you have a high-yield savings account, you could accrue over 5%. On the other hand, if you have a substantial sum of money in any given savings account, you might also receive a higher APY from certain banks. If you want to practice saving, you could also put some of your finances into a CD, which generally has higher APYs.

Interest can be "mid" if you are only receiving 0.1%, but saving your finances in the right accounts can give you high returns!
• Think of interest like a fee for borrowing money. When you get a loan, the bank will charge you interest. Meaning that you have to pay back the loan AND a bit extra based on the interest rate of your loan.
On the other hand, if you have a savings account, the bank is borrowing that money from you, so the bank will pay you a little bit extra every year based on the interest rate of your account.

It is good if someone is paying you interest. It is bad if you are paying interest to someone else.
• what would happen if the banks failed again like the Great Depression in the 30's?

How would the federally insured money that we put in the bank get back to us if it all went down the drain?

Also, we better not have another depression based on all this money that has been circulated through inflation!
-Izzy <3
• Most banks are insured by the FDIC (Federal Deposit Insurance Corporation), which means that up to $250,000 of any account holder is protected. If a bank fails, the FDIC would help the affected connect with other banks and get their insured finances, or give the same amount via a check. Because the FDIC is independent of the US government, it depends on insurance premiums (or monthly payments) from all of the banks that it insures. Although it has quite a sum of money, it can also receive additional support from the Treasury if there is serious trouble in insuring all affected account holders. In general, the FDIC is intended to create some legitimacy and security in the US financial system even amidst economic crises. Although banks aren't required to be FDIC insured, being so helps customers feel safer putting their finances into the respective banking institution. (10 votes) • what happens if banks fail like how will they pay people their money if it isn't available to them or if the us dollar crashes. like a mortgage states if the legal tender changes the contract is void does that mean i would own the house? (2 votes) • You are WAY out there. Since the great depression of the 1930s, when many banks failed (and depositors lost their savings), the US Federal Government requires banks to participate in a deposit insurance plan. ALL federally recognized banks pay insurance premiums based on how much money is deposited in them. If a bank has problems, the money to cover the deposits of accounts less than$250,000 is available so that no small-time depositors lose anything.

Don't worry about bank failures. There are many more serious threats out there, like guns in your neighborhood.
• Does interest accrue as an average of input over the course of a year, or does it only consider the lump sum at the end of the year?
• This depends on how the interest is compounded, whether daily, monthly, quarterly or annually. It pays to check. You may be getting charged on a daily compounding rate for money you owe, and paid on a quarterly rate for money you save. Ask your bank.
• what happens to interest when there is inflation ? for example, interest rate is 5% and inflation rate is also 5%!
• Interest is sometimes adjusted. Inflation moves back and forth. Your deposit may get inflated away (as did savings in Russia in the 1990s). Still, savings and investments that pay interest are better than money hidden under the mattress or buried in a jar in the back yard.
• Can Interest rates rise or fall?
• Interest rates both rise and fall. When there's lots of money in the system that's going noplace, interest rates fall to encourage people to borrow and put the money to work. When there's not so much available money in the system, and a lot of people or businesses want to borrow, banks charge more to loan it out because that's the way that banks earn money.