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Compound Interest · Talking FACS

• 0:01
  Welcome to Talking FACS.
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  What you need to know about family food finance and fitness.
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  This nationally recognized award-winning podcast is hosted by the University of Kentucky Family and Consumer Sciences Extension Program.
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  Our educators share research knowledge with individuals,
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  families and communities to improve quality of life.
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  Hello and welcome to Talking FACS.
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  What you need to know about family food,
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  finance and fitness.
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  I am your host,
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  Mindy McCulley,
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  Family and Consumer Sciences Extension Specialist for instructional support at the University of Kentucky.
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  We are celebrating Financial Literacy Month and so this month,
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  we are really focusing on topics that are related to your finances.
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  My guest today is Kelly May Extension Associate for family finance and resource management.
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  Welcome,
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  Kelly.
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  Hi,
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  Mindy.
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  Thanks for having me.
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  We are going to talk about a fun topic today and it's a topic that I don't know if you watch Jeopardy,
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  but I watch Jeopardy and all three of the Jeopardy contestants did not know the answer answer to the question when asked about compound interest.
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  So hopefully,
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  if they're listening today,
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  they're gonna learn something that you're going to tell them about how to put compound interest to work for them.
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  That's the goal.
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  We,
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  we want your money to work for you and so that you can make more from the money you already have.
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  So let's just explain to our listeners and to any jeopardy contestants who might be listening,
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  what is compound interest?
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  When your interest is compounded,
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  you earn profit on the money you save as well as the interest you've already earned.
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  So there is simple interest and compound interest and simple interest only earns profit on the principal and the principal is the money that you save.
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  So if you put money in your account and it only has simple interest,
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  you will earn interest on the money you put in the account.
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  But if you have compound interest,
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  it's even better because it will earn money on the money you put in and on any interest that you earn.
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  So you're actually earning money on the money you've earned.
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  So compound interest helps your money grow faster over time.
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  And the more often it's compounded,
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  the greater your benefits will be.
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  So we can be really simple and say if you put $100 in and you earn $10 in interest and your interest is compounded,
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  then the next time you earn interest,
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  you're gonna earn interest on 100 and $10 instead of $100.
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  Right.
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  That's right.
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  That's right.
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  So you're always going to earn more interest with compound interest,
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  then you will earn with simple interest.
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  That's right.
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  And the more often it's compounded,
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  the more you will earn and the higher the interest rate,
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  the more you will earn.
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  That's a really great point.
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  Some people don't realize that if uh,
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  interest is compounded monthly or daily or yearly,
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  it's going to impact how much money they earn.
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  Right.
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  That's right.
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  So the more often that it happens,
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  the more benefit you'll receive.
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  How does this work for you or against you?
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  Oh,
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  that is a good question because we're talking about saving and of course,
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  if you're saving it works for you.
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  But where else do we find interest in our lives?
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  So,
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  if we are paying interest,
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  right,
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  if we're borrowing so on our credit products,
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  we,
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  we have interest on those as well.
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  And um,
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  guess what,
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  sometimes those compound too.
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  So compound interest works both ways.
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  If you're saving that's money you earn.
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  But of course,
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  if you are borrowing that's money that you pay.
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  So pay attention to your rates on all your banking and finance products,
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  um,
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  because you know,
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  you're likely paying interest on the,
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  the loans and the credit cards and the,
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  the money you borrow.
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  And if that money is,
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  um,
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  compound interest as well,
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  of course,
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  your debt will build faster.
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  So compound interest works for you on savings,
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  but it can work against you on your credit.
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  Isn't that why you're gonna see sometimes that your interest rate and your apr might be different,
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  right.
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  Well,
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  the APR includes the effects of compounding.
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  So if you're going to compare two accounts and you want to know which one is the better deal for you,
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  look at the APR rate on both the annual percentage rate and that will show the effects of the compounding.
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  So that's right.
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  Very good.
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  So we always want to compare apples to apples and not apples to oranges and make sure that we are comparing the right rates and not just that what we think might be the,
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  the interest rate,
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  um,
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  that we are paying on a loan product as you said,
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  right?
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  So how do we find out what our interest rate is?
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  You could,
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  um,
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  check your paperwork or talk with somebody from your financial institution to see what kind of products they offer.
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  Of course,
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  you don't have to stay in the same account you've always been in.
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  You,
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  you do have the option to shop around and change.
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  We can compare different products and like you said,
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  use the APR see what that interest is and how often it compounds.
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  Uh,
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  maybe you can switch from an account that only compounds once a year to one that compounds every month or every day.
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  The rates have gone up.
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  I don't know if you've noticed,
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  but the,
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  the Federal Reserve's Federal Open Market Committee has raised the federal funds rate multiple times.
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  In fact,
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  during the last year,
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  during 2022 they raised the rate seven times to combat inflation.
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  Um and to help with,
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  with the pandemic's effect on the economy.
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  So things have been changing and right now rates are higher,
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  your regular savings account rates um are still fairly low though.
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  So check your rates at your,
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  at your bank or your credit union and see what kind of interest rate you're getting and maybe check out a high yield account.
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  If you have some money saved,
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  you may be able to switch to a different kind of account,
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  high yield accounts,
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  earn a little bit more interest for your money.
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  And of course,
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  you have to check the terms you want to know what the rules are.
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  So you can play by the rules,
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  see what the fees are.
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  And if there's a,
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  a minimum amount you have to put in and how long you have to keep that money in there.
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  And if you have CD certificates of deposit,
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  check the rates on those too,
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  because if they have rolled over over time,
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  they may roll over at the old lower rate and a lot of places have specials right now.
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  So it might be worth it to cash it out,
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  pay the penalty and get it in there at that higher rate if there is one available.
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  So it's worth asking,
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  you know,
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  just check and see,
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  see what the options are.
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  Kelly,
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  is there a simple math formula to figure out what the interest rate?
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  Is that you're paying or that you're earning.
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  So there are lots of financial calculators online and I would recommend that you check a few.
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  So don't just check the first one you go to because they're not all the same.
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  I would check at least three.
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  So find a few websites and type your information in and see what you come up with.
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  And if you come up with three,
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  they're about the same,
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  then,
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  you know,
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  that's a good idea of what your money might earn.
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  So that's,
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  that's probably the easiest way to find out.
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  This is fascinating information for me because I'm a numbers girl and I love to play with these things.
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  But for those people who don't like the numbers,
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  we have these resources available and you can just plug your information in and figure out where you're going.
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  It's all fun and it's all good when you're on the earnings side and when you're on the paying side,
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  then you want to make sure that you are paying as little as possible.
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  Right?
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  That's right.
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  Kelly.
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  Thanks so much for joining me for this conversation and of course,
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  we are celebrating financial literacy month this month.
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  So the more information that we have,
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  the better we'll all be off if you are just joining us,
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  you are listening to Talking Facts and you can find us wherever you listen to your favorite podcast.
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