How simple and compound Interest are calculated

Simple Interest Calculation

Dollar Amount x Interest rate x Length of Time (in years) = Amount Earned

 Example

  •  If you had $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest.

 $100 x 0.06 x 1 = $6

At the end of two years you would have earned $12.

The account would continue to grow at a rate of $6 per year, despite the accumulated interest.

Compound Interest Calculation

Interest is paid on original amount of deposit, plus any interest earned.

 (Original $ Amount + Earned Interest) x Interest Rate

x Length of Time = Amount Earned

 Example

  • If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6.00 in interest.

 $100 x 0.06 x 1 = $6

$100 + $6 = $106

 With compound interest, the second year you would earn $6.36 in interest.

The calculation the second year would look like this:

$106 x 0.06 x 1 = $6.36

$106 + 6.36 = $112.36

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Money Savings Account

 

Money-Market Deposit Accounts

What they are and how they work

  • Checking/savings account.
  • Interest rate paid built on a multifaceted makeup that fluctuates with size of balance and current level of market interest rates.
  • Can obtain your money from an ATM, a teller, or by writing up to three checks a month.

 Benefits

  • Instant access to your money.

 Trade-offs

  • Typically requires a minimum balance of $1,000 to $2,500.
  • Limited number of checks can be written each month.
  • Average yield (rate of return) higher than regular savings accounts.

 

Certificates of deposit (CDs)

What they are and how they work

  • Bank pays a fixed amount of interest for a fixed amount of money during a fixed amount of time.

Benefits

  • No risk
  • Simple
  • No fees
  • Offers higher interest rates than savings accounts.

Trade-offs

  • Limited access to your money Withdrawal penalty if cashed before expiration date (penalty might be higher than the interest earned)

 Types of certificates of deposit

1. Rising-rate CDs with higher rates at various intervals, such as every six months.

2. Stock-indexed CDs with earnings based on the stock market.

3. Callable CDs with higher rates and long-term maturities, as high as 10–15 years.But keep in mind, the bank may “call” the account after a stipulated period, such as one or two years, if interest rates drop.

4. Global CDs merges higher interest with a hedge on future changes in the dollar compared to other currencies.

5. Promotional CDs tries to attract savers with gifts or special rates.

Different Types of Savings Account

Different Types of Savings Account

Passbook account

  • Depositor obtains a booklet in which deposits, withdrawals, and interest are documented.
  • Average interest rate is lesser at banks and savings and loans than at credit unions.
  • Funds are easily accessible.

 Statement account

  • Basically  resembling a passbook account, except depositors receive monthly statements instead of a passbook.
  • Accounts are usually accessible through 24-hour automated teller machines (ATMs).
  • Interest rates are identical to passbook account.
  • Money in the account is effortlessly available.

Interest-earning checking account

  • This type of account merges benefits of checking and savings.
  • Depositor makes interest on any vacant money in his/her account.

Another Crisis

The United States just got over the fiscal cliff obstacle and now we are about to face another. This time is about the debt ceiling; if the debt ceiling isnt raised we face a risk of further credit downgrade and a default on our obligations. In anticipation of what is expected to be a tough fight stocks opened lower on monday. From this point forward until the fate of debt ceiling is revealed I will be a cautious investor and will play defensive. Playing defensive means investing in gold and other areas that would take a lower hit. According to CNNMoney.com “After weeks of trepidation over the fiscal cliff, lawmakers reached a last-minute compromise that forestalled the worst of the crisis. But officials in Washington are now gearing up for a fight over the nation’s legal borrowing limit, known as the debt ceiling.If the ceiling isn’t raised by late February or early March, the United States runs the risk of defaulting on its obligations because the Treasury would no longer have enough money available to pay all the country’s bills.”The debt ceiling is the new wall of worry for stocks,” said Anthony Conroy, head trader at BNY ConvergEx Group.” Click here to read the full article.

Comparing Apples to Apples

We all have new years resolutions and perhaps opening a new bank account is in yours. Comparing banks worksheet

As you hunt for the best bank, watch out for these hidden fees:

• Monthly maintenance fees

• Overdraft fees

• Minimum balance requirements

• ATM charges

• Penalties for breaking terms

• Withdrawal limits

Keep your eyes open for these tech savvy, services:

• Online bill payment

• Direct deposit

• Availability to check account

balances 24/7

• Text message banking

• Mobile Web apps

• Account alerts

What was Kept

 

I have been following the fiscal cliff ordeal very closely and when a deal was still not reached by December 31 I was bracing myself for the worst. Thankfully, a deal was reached on January 1. There was no deal on deep cuts but people making over $400,000 will see their taxes significantly raised and there are other parts of the deal. For families who were worried about losing money on significant tax credits they can stop worrying. According to CNNMoney.com ” Earned Income Tax Credit,which is estimated to keep millions of Americans out of poverty each year and especially benefits working parents with children, will also be restored for five years rather than being scaled back”. Also the Child and Dependent Care Tax Credit was extended permanently. The coming fight will be on raising the debt ceiling and further cuts in order to balance the budget.  I just hope that it wont be all drama when that time comes. The only tax credit that was cut was the payroll tax. A cut in the payroll tax means that workers will see smaller paychecks. According to CNNMoney.com “Roughly 160 million workers can expect to pay more payroll tax, which funds Social Security, in the new year. People earning the national average salary of $41,000 will get $32 less in their biweekly paychecks. Shivers, who makes $84,000, will see his annual pay shrink by a total of $1,700.”  Click here to read the full CNNMoney article.