Interest can be a difficult subject to master, but once you have you will be glad you took the time. It is a fascinating subject, but one that seems shrouded in mystery and not easily understood. This is the wrong approach if you are looking to make your money work and work hard for you. You will need to be able to spot a good deal and one that might appear great but in truth performs pretty poorly.
The interest rate is the money that you either are given for investing your savings or the added to money owed if you borrowed some. There are different kinds of interest and compound interest is just one of them.
Compound interest is one option that when you take out a loan or savings account it is the kind of interest that will be applied to that product. It means that the interest is added on to the total of the loan or the savings and then this is repeated the next time interest is applied. If this is a savings account then it is going to benefit you, you will be earning money on the interest that you previously earned. But if it is a loan then you are increasing the loan amount each month when the interest is added.
A popular product at the moment is a regular savings account, they draw in the customers with promise of high interest rates, but there is a catch. The interest is applied to the balance each month and not at point of year end, this means that you will not make as much money if you were paid at the end of year because each month the maximum amount of money paid into the account is set by an account limit. So, the interest is working for you but not as hard as you would like, or what you could get from other products.
If you take out a loan you need to be aware not just of the interest rate but the compounding frequency, this indicates the frequency that the interest is applied and this will help identify the best products for you with not only the best interest rates but the best frequency of compounding.
Yet, if you are to save and you get compounding interest it is a great way to make money with money that you have earned by doing nothing. Each time that you get interest it is building on the original capital plus the interest and this makes the interest work for you as well. But there are ways to make compound interest work against you even in the savings, or to make it look more appeal than it actually is and this is what you need to be on the lookout for when you are looking for products to invest in.
Therefore, it is important to understand the type of interest you are being charged, or earning, so that you make the right decisions when it comes to your finances.