We’re totally bad at math. But if you’re shopping around for banking investments, it’s good to know how to convert the bank’s stated interest rates to the annual Percentage Yield, or APY.
It ain’t alchemy but it can turn lead into gold.
If the stated rate is 5%, and you put in $100, how much do you get after a year? You might say $5, but thanks to the magic of compound interest, it’s actually $5.13. Multiply that by more time, bigger principal, and the difference could be huge.
AllFiancialMatters has the magic formula and a little more explanation.
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Thanks for the mention!
when has a bank ever given an interest rate? ive only ever seen APY’s
This reminds me of the video at Google entitled Arithmetic, Population, and Energy which is a basic math course which shows the power of compound interest and how screwed we (as people) are in terms of energy consumption.