What do these numbers mean?
When you put your money into the credit union, your money earns interest.
But, do you really know how much money you may have in the future based on
your current investments?
Your wealth is based on what you save, not what you
spend. Below we will explain to you how you can build your wealth by understanding
how interest rates work and how they can work for you.
What is the Difference between APR (Annual Percentage Rate) and APY (Annual Percentage Yield)?
The main difference between APR and APY is compounding
APR is the annual rate of interest without taking into account the compounding
of interest within that year. On the other hand, APY does
take into account
the effects of compounding of interest within that year.
APR reflects the annual interest rate that is paid on an investment, but does
not take into effect how often that interest is applied. APY takes into account
how often the interest is applied to the balance, which can range anywhere
from daily to annually.
When considering interest rates, make sure to compare APY to APY and look for how
often interest is paid.
What is the Difference between Simple and Compound Interest?
Compound is when interest is paid on interest. The interest earned in each period is
added to the principal to become the principal for the next period. This means that you
will earn interest on your interest. That is putting your money to work for you!
Simple interest is the most basic type of interest. It is figured only on the amount of
the principal. Interest is computed from the original principal alone, no matter how much
money has accrued so far.
At SECU, the interest on Share, Money Market, Checking accounts and tax-advantaged accounts
are compounded daily and paid monthly.
The examples below will show you how important it is to take into consideration
how often interest is compounded within the year, as well as, the different
earnings from compound and simple interest.
The example below is of a one-time deposit of $5,000 with an interest rate of 4%.
The compound interest below is compounded yearly.
The example below is of a one-time deposit of $5,000 with an interest rate
of 4%. The compounded interest below is compounded daily like our Share,
Money Market, Checking, and tax-advantaged accounts.
Now that you understand the differences in APR and APY, you can feel
comfortable making sound judgments about your investments!