Interest is your compensation for letting somebody use your money. Interest is that extra money you get when you lend money or deposit your money into interest bearing account.
It’s worthy of note as you build your savings, it’s important for you to learn the interest you make on your saving. This allows you to set up goals also help you to measure your performance toward achieving the set goals.
How are interest made from my bank account?
When you make deposit to your savings account or certificates of deposits (CDs) at a bank or credit union, you are lending your money to the bank. The bank will then invest the money elsewhere or lend it to their customers to invest. Those customers later return the money with extra charges after investment to the banks. Then bank have to do some calculation on the profit for the money those investors return then ration the profit at a specific rate to your account. That’s how you gain interest from your savings.
It’s relatively easy to calculate interest form your savings account, but before calculation some basic information must be understood;
The interest rate, using (l) and the intreset in decimal
The amount of your deposit or the amount you lend,using the varible (p) for principal
When interest is calculate or paid, is yearly, monthly or weekly. Using (n) to represent number of times per year.
How long you’ll earn interest for, using (t) to represent time in years.
Practical example: Assume you deposit $200 at your bank, you earn interest annually, and the account pays 5 percent. How much will you have after one year?
Using simple interest formula:
i.e (principal) (rate) (time) equals to (interest)