10 points for a banking question!!! 10 points....?

Question

I just turned 18 and so i wanna open a bank acct. Now, Im new at this so I have a question. At wahignton mutual online, they have an online offer where u open a savings and checkings account with them and you get an interest rate of 4.89% and a APY of 5.00%. Now, what does this mean? That Im gonna make 5% more every year or what?

Answer 1

Most of the answers people are giving you are incorrect. You don't earn 5 cents for every 100 dollars. No, your rate will not stay at 5% always as banks may change their rates periodically in order to be competitive and as the Federal Reserve Bank changes rates to handle the US economy. No, the interest isn't calculated and added to your account yearly (because that's a simple interest calculation). And no, you aren't earning "just" 4.89 % with an AYP for you to compare with other banks--you are actually earning 5%. Other AYP's will show you how much they compound through the year. See Below.

THE REAL ANSWER: You are earning 4.89% on your money, but the bank compounds interest, meaning that they add the interest to your principal monthly, and add it all together and give you interest on the whole new balance the next month. You have the advantage of earning more on your money with the compounding process and earn 5% by year's end.

For example, if you invested $100 and the bank gave you 4.89% interest at the end of one year, you'd have $104.89, not $105. Since the bank adds interest to your principal each month (4.89% / 12) and at the end of the next month adds interest on the new balance, you are earning more through the year until your money equals $105. Your "effective annual percentage," also known as annual percentage yield (AYP) is then 5% not 4.89%. The 5% is the rate that you "effectively" earn for the year.

While it doesn't look like a big deal at the $100 level, think about if you had a balance of $100,000. Instead of earning $4890, you have earned $5000, a difference of $110. But that's just one year's difference. So you see over time, with monthly compounding, your balances grow bigger than if the bank awarded interest just on a yearly basis.

Banks started doing this to compete with each other years ago. Some compound quarterly, some monthly, some continuously. In your case Washington Mutual is compounding monthly. See the 1728 site for the calculations and the wikipedia site for the mathematical formula.

Please rate me if I have provided what you need.

Answer 2

You will not get 5% interest rate every year but 4.89% in your case. APY is only a rate used for advertising purposes so that you can compare it with other financial institutions. It assumes that the interest that you will receive will be compounded in the account.

Answer 3

Read the fine print, but that is the general idea. It should be compound interest too which is a cool concept.

i.e: If you put $100 in your account today and leave it there for a year, the bank will pay you $5 (5% of 100)

But

In year two, they will pay you 5% of $105. It doesn't sound like much but Einstein said it was the most powerful force he ever knew!

Learning to save is one of the smartest things you can do. Good Luck.

Answer 4

APY is Annual Percentage Yield. It takes into account that the 4.89 is compounded. You will get 5% if you leave it there. It won't increase every year though.

Answer 5

bout 5 cents for every hundred