like lets say you put $1,000,000 in a savings and the interest rate is 1%, that would be $10,000. would you get the $10,000 each month or do you just get $10,000 at the end of the year. cause if you got it each month then you’d get $120,000 in interest by the time the year is up, if not each month then yearly it would only be $10,000.
how does that work? can you collect each month or just yearly?
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Interest on checking accounts compounds daily, and is usually added once per month. Once it is added, you can take it out.
So, for example, if you had a lot of money in your account at the beginning of the month and took it out on the 15th leaving a zero balance, then at the end of the month you would get 14 days worth of interest.
To compute the daily rate, divide the interest rate by 360 (not 365). In your example above, where the rate is 1%, you would get a daily interest rate of (1%/360). If you kept your million dollars for a full year you would have this much at the end of the year:
$1,000,000 * (1+1%/360)^365 = $1,010,090.32
—-EDIT—-
I see that a lot of people here are telling you that bank accounts compound monthly. This is speculation on their part, because interest is deposited once per month.
Most banks pay interest on savings accounts monthly, so they would turn that annual rate into a monthly one.
As for how much you’d get, you also have to remember that most banks use compound interest for savings accounts, which means that you’d be getting interest on BOTH your initial deposit and all interest earned. In other words, your interest also earns interest, so your money would grow faster.
Your figures are off a bit, instead of 10K each month, you’d only be getting 833.33 a month (1/12th of 1%), or you’re earning 12% a year — which would be fantastic if you can get it. You can collect yearly (depending on the bank), but it’s usually a better deal to collect monthly.
How It Works:
When dealing with interest rates, there are a few numbers you need to know. The first two are Annual Percentage Rate (APR) and Annual Percentage Yield (APY). The APR is the rate (in your example, 1%) the bank figures the interest payment from. APY is a derived amount, and tells you the change (yield) you actually see at the end of the year. Two banks with the same APR can have different APYs because of how they figure the interest.
This is because of the principle of compound interest. Basically, when you earn “compound interest”, you earn money on the interest as well as the principal. Most of the banks I have dealt with have used one of two methods of compounding interest.
The first is generally referred to as “Average Daily Balance, Compounded Monthly”. With this method, they record the balance of your account every day. At the end of the month, they take the simple average (sum total / number of days) of your account balance, and deposit one month’s worth of interest — or 1/12th of the interest rate ( x%/12 ) — into your account. After the payment, that interest is included in the average balance.
The second method is similar, but instead of an average, the interest is figured daily ( balance * (x% / days in the year) ), but added at specific intervals — usually monthly. This is a better deal for the consumer, if you can find it: most banks using this method use a standardized 360 day year ( I = P*r / 360) instead of the actual 365/6 day year ( I = P*r / 365 ).
If the interest rate is stated to be 1%, then it’s yearly (but this should be written somewhere too). That is, you get 10000 at the end of a year if you put in 1000000 at the beginning of the year. Some banks pay interest “compounded monthly”, i.e. they pay you 1/12 of 1% (in this case) every month. At the end of the year you would find 10046 on your account, i.e. a little more because of the compounding effect. But nowhere near 120000. Don’t expect to earn so much from a bank savings account.
Depends on the bank, but it’s usually added in every month.
The interest rate stated by banks is for the year . You might get the monthly amount which is 1/12 of 1%. It depends on your plan.