Long gone are the days in which Italian nobles laid the foundations for modern banking, and the intervening centuries have added so much complexity and intricacy to the practice that financial literacy is now more important than ever. Learning to understand the meaning behind terms like principal and yield or the function of tools like interest tables and budgeting plans is essential to navigating and managing your personal finances.
Personal Finance Literacy
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Personal finance is an inextricable part of life for most people. Advances in technology and their widespread adoption in the developed world have radically altered the landscape of banking in recent years, giving the average person more direct control over their financial decisions.
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Through online websites and mobile banking apps, the potential exists for almost anyone with a bank account to take action with it as long as they have an internet connection. This is why it's so important that we know what we're doing before we decide to do it.
Understanding basic banking concepts like compound interest is essential to choosing the right bank accounts or investment vehicles and to ensuring your account balance is correct. You'll need to understand the basics of interest before you can properly use or understand the results of a compound interest table.
Basics of Interest
The amount of money accrued by a savings account with each cycle is known as interest. Interest can be calculated using the principal, interest rate and the period of time over which it is accrued. The principal is the initial amount of money on which interest accrues. In other words, it's the first chunk of change in a savings account or the starting amount of a debt owed.
The interest rate, much as the name implies, is the rate at which interest accrues over a given period of time, and it is usually represented by a percentage. For example, if a savings account opened with $100 was worth $105 at the end of one year, its annual interest rate would be 5 percent. Not all interest is created equal, however, and some calculations of interest are much less straightforward.
The two main kinds of interest are simple and compound, and the difference between them has fairly important implications for interest accrual over time. In simple interest, only the original starting amount is factored into the interest that gets added to it. Compound interest, on the other hand, considers the entire value of the account or debt each time interest accrues. As you might expect, compound interest resists prediction more than simple interest does.
Consider also: How to Calculate Simple Interest & Compound Interest
Interest Tables, Calculators and More
Luckily, there are plenty of online resources available to you to help you understand interest and how it's calculated. Some may even do the math for you. One such resource is Investor.gov, which offers a brief overview of compound interest. This resource also offers an interest calculator, which can give you a quick estimate of how much you can expect your savings to grow depending on the parameters you give it.
Compound interest tables are another helpful resource you can use to quickly get information about what to expect from your interest accrual. Interest tables can be used for both simple and compound interest. A compounding table is typically organized by interest rate and time spent collecting interest. An estimated value can be found by finding the cell at the intersection of your interest rate and the age of your account and multiplying its value by your principal amount.
Personal finance can definitely take some getting used to, which is why the writers from FTC.gov recommend familiarizing yourself with it as soon as possible using savings plans, budgets and other helpful tools.