“Interest” plays a vital role in the finance world such as saving for retirement and paying off debts. That’s why it’s necessary to discuss this concept with your kids and answer their questions about it. Knowing about it can help them build wealth and make smart money decisions when they get older. That’s why YounGo has decided to talk about earned interest, its details, and the perfect ways to explain it to your kids.
In general, interest is the cost the borrower should pay for borrowing the money, and it normally is described as a percentage which is paid to the lender of money.
What Is Earned Interest?
If you invest your money or put it in a saving account, the money you make out of them is called earned interest. To put it in simple words, it’s like having your money go to work and let you use the income it makes. By putting money in a bank account, you’ll make the bank the borrower, and you can make more money by turning to a lender.
What is Earned Simple Interest?
The amount of earned interest you make on your savings is simple interest. As the name suggests, a paycheck, it’s the amount of money you gain from putting your money to work. By withdrawing the simple interest every month, it will simply turn into an income.
Simple interest is the quick method of calculating interest.
For instance, if you want to calculate the interest on borrowing £60 for a 5% interest rate per year, all you need to do is to calculate the 5% of £60 which is £3. As a result, the total amount you need to repay is £63.
This subject may attract the attention of your kids as they wonder how to use their savings to make money before getting their first job.
What Is Earned Compound Interest?
If you want to show your kids the real power of interest, you should consider talking about earned compound interest. Earned compound interest is when you add your earned simple interest to your savings and put it to work.
For calculation, if you want to know the earned interest of borrowing £40 for three years with a 5% interest rate per year you should stick to the following instructions:
First Year: £40 × 5%= £2
Second Year: £42×5%=£2.10 £42+£2.10=£44.10
Third Year: £44.10×5%= £2.21
To put it in simple words, it exactly is earning interest on your interest. The more time you keep your earned interest work for you, the more money you’ll make.
Now that you know the meaning of earned simple and compound interest, you can easily understand their differences.
These two earned interests differ in the way the interest is accumulated.
How Is Earned Interest Paid to You?
The bank announces the interest rate it’ll pay you as an APY or Annual Percentage Yield when you go there to open a saving account. Pay attention to the interest rate they offer, and if you were not satisfied, search for their other options or go to other banks for a better interest rate as it directly affects the amount you get paid.
What Is Earned Accrued Interest?
It’s obvious that you earn the interest every day, but it is generally paid by banks or investments monthly or quarterly. The concept of earned accrued interest simply is the amount you earn, but it is not yet accumulated.
What Is Equity interest?
Earning interest doesn’t happen only by having a saving account. The other method to earn interest is being a shareholder of a business which is called equity interest. For instance, having 20% equity in a corporation simply means that the stakeholder owns 20% of that business. Talk to your kids about stocks and shares and their definitions.
Earned Interest and YounGo Money
Open your kids a saving account and track the interest they earn using YounGo app.