How to turn 3% interest into 100% knowledge

Percentages are handy little things if you know how to use them. Do your eyes glaze when your favorite news broadcast moves beyond the scandal of the day to the stock market report? Do you yawn and say to yourself, “So the Dow Jones Industrial Average was up 3% today. Big deal -- my bank pays me 3% on my savings account”?

Get a grip on your armchair -- I have some rocketing news about those two percentages, perhaps even enough fuel to send you back to math class. If you’re receiving 3% on your savings account, that’s 3% per year, not 3% in a day. Knowing the difference between those two percentages can literally make the difference between comfortable wealth and lifelong financial struggle!

I’m not a stock broker, a banker, or even an amateur financial guru. But I am one of those females who got straight A’s in math (all right, all right, when I hit trigonometry, it dropped to a B). That was a few decades ago, but every other day, I find use for fractions, decimals, percentages…even a little algebra.

If you were never much of a math student, grit your teeth and do the following simple multiplication and division problems. It’s OK to use a calculator for the slave work. DO IT! It’s important.

Before you get started, pretend you have $100 in the local bank -- in that 3% savings account we discussed in the first paragraph. (I hope you have more money tucked away, but that’s a different story.)

· Multiply 100 by 3%. If the calculator doesn’t have a “percent” key, multiply by .03
· The resulting figure is 3.00 (That’s $3, in case you don’t recognize it – yes, the bank is paying you only $3 a year on your $100 deposit)
· Now divide 3.00 by 365 (the number of days in a year)
· The number on your calculator should read .0082
· How much money did your savings account earn in a day? 8/10 of a penny (refresher: a penny is .01 or 1/100 of a dollar)

If you’d had that money invested in the Dow Jones Industrial Average on the day of our fictitious, but not unrealistic, news broadcast, your $100 would have earned $3.00 instead of less than a single cent.

If you had $1,000 invested, the financial difference is 10 times as dramatic. You could have earned $30 in a day with the Dow Jones, whereas in the bank you would have made a whopping 8.2 cents.

All interest rates – whether it’s money coming in (on savings or investments) or going out (on loans or credit cards) – should be calculated and compared on an annualized basis. Ask your banker or broker about the APY or annual percentage yield on deposits. On debt, you’ll need to know the APR – annual percentage rate.

All these figures have been simplified for the purpose of clarity. You’d be wise to learn about compound interest, too. But, as they say, that’s another story.