Squirrelly Needs Banking Advise

I'm looking into getting a bank account finally seeing as this squirrel is earning enough funds that he can't keep it hidden in a hollow tree or under the bed anymore. So for the first time Squirrelly is looking into banking things and has absolutely no idea what the hell he's reading.

What is this APY? When do I get this free money from interest? Why is it that the calculator says if I wait 10 years I'll only be earning 6 dollars of a 1000 dollar deposit?

Waaaah! Squirrelly's only savings knowledge is hiding away nuts and berry's for the winter! Squirrels aren't meant to be fiscally responsible!

Tatsukette!

 

APY is how large a percentage of your deposit'll be paid to you yearly over the course of all the compounding periods within the year. The frequency with which you get your interest money is determined by the length of the compounding period. Is monthly, yearly, twice a year, quarterly?
Also, most interest rates you'll get on a savings account are tiny tiny numbers in comparison to the ones you're expected to pay on a loan or credit card. There's also the consideration of whether you're getting simple or compound interest: will you only be getting interest on what you yourself add to the account, or will you get interest...on your interest?

Further things to consider: how often will you be adding money to the account, and how much (hypothetically)?

As to the six dollars over ten years thing, I know your principle's $1000 dollars, but is the period annual and the interest rate .06%?

Also, interest isn't 'free money'.
It's them paying you a share of the interest they earned loaning the money out to people.
'Cause that's how savings accounts work.
Don't let that worry you, though, because they don't reduce the money in your account if one of their debtors defaults, nor does it arbitrarily drop your interest rate if your money isn't going into profitable investments. Even if the bank goes bankrupt, if it's FDIC insured (in the USA) every depositer'll still have up to $250,000 (Two Hundred And Fifty Thousand Dollars) of any deposited money from every account category they had at the bank (Savings and Checking are the ones you'd usually have), thanks to the federal government insuring bank deposits to keep people from not using the banks.

Since you're talking about putting $1000 dollars in, that's completely and totally covered by the federal government in the incredibly unlikely situation of the bank dieing an ignoble death.
Unless you've managed to find one the FDIC doesn't insure, which could be a sign of other problems.

 

Right, so banks have two factors at play when it comes to interest: rate and number of compounding periods.

For example, lets say you have a bank with 20% interest that compounds yearly (you will not have something like this). You put $1000 into this account. At the end of the year, you get 20% interest, so you end up with $1200.

On the other hand, you have a bank with 20% interest that compounds twice a year (also not going to get this). After half a year, you get half the interest (10%) bringing you up to $1100. Then, at the end of the year, you get 10% again, bringing you to $1210.

APY (annual percentage yield) is just normalizing rate and period into a single number, by setting the period to once and year and adjusting the rate accordingly. Math lets you do this. The first example had an an APY of 20% and the second 21%. APY allowed you to easily compare different rates like 1% compounded daily (about equivalent to 1.005% compounded yearly), 1% compounded monthly (about 1.0045%), and 1% compounded quarterly (about 1.0037%). You'll notice that the period of interest doesn't actually change how much money you are getting by much. Even compounding at an infinite rate doesn't change this (you'd get 1.005%, about the same as daily interest).

If two accounts have the same APY, they give the same amount of money each year, no matter what period each had. Assuming of course, you don't touch the money. If you are withdrawing, there is a very slight advantage to a more frequent period. If you are depositing, there's a slight advantage to a less frequent period.

The money will be applied automatically to your account at every period. You will see it marked as interest in your monthly/quarterly statements or online.

Your calculations show you have 0.06% interest rate, which is reasonable enough for a bank as opposed to a Credit Union (a non profit banking service with limited eligibility and less services that tends to have much better pure rates).

You can find banks with 4% interest, but that should probably make you wary, not excited. In general, the higher the interest rate, the more restrictions and fees that come with, usually minimum deposits amounts and the like.

In the end, unless you are absurdly rich, interest is not something to live off of but rather a manner to sandbag against inflation (you'll still lose value to it, but slightly less). The real advantage to savings is having a savings, interest isn't that big a thing.

Keep interest in mind when shopping for a bank, but also keep in mind other factors, like potential fees, restrictions on withdrawal, and rewards programs, and see what works for you.

 

Firstly, those beautiful numbers. 20%? *Mr_John drools a little*

Secondly, absolutely beautiful translation of the interest mechanic of banks. Really, really good job.

 

APY on a savings account is absolutely tiny; if you have a checking account with a monthly fee (some charge you $10 a month, somewhere around there; student accounts usually don't do this). You can pretty much ignore it. An IRA or 401k is a little better, but then you can't withdraw the money until you're like 60+ without fees.

If you want to make money on your savings, putting it into stocks is usually a good idea. Banks will have advisors on that stuff that you can go see just by walking in, or at least my credit union does.