Money can be hard. Earning and saving it can be challenging, and with so many different terms and acronyms, it can be hard to understand.
In this blog, we’re bringing it back to the basics and defining some common savings words. We’ll tell you what each term means, related terms and hopefully help you to better understand your finances.
Annual Percentage Rate
Annual percentage rate (APR) for loans is designed to provide a uniform measure for comparing the cost of various credit transactions. The APR is a measure of the cost of credit, expressed as a nominal yearly rate. Before a loan is distributed, financial institutions must disclose the APR.
Annual Percentage Yield
An annual percentage yield, commonly referred to as APY, is the amount of dividends (or interest) your account earns in a year. When you open a savings account, you should know your APY so you know how much money your savings can earn in a year. APY does take compounding into account. Before opening an account, the financial institution must disclose the APY. The higher the APY, the faster your savings will grow.
Compounding is the process that takes an asset’s earnings and reinvests them so you can earn more over time. For example, if you start with $100 and earn $10, you’ll earn dividends or interest on the $110, not just the initial investment of $100. An easy way to think about compounding is “interest on interest.” When financial institutions calculate compounded interest, they will use a set period such as annual, monthly or daily.
While the word deposit has multiple meanings in the financial world, in the case of savings, a deposit simply means the money that is held at a financial institution. When a person deposits money at a financial institution, the money still belongs to that person, and it can be withdrawn or transferred at any time (though sometimes with a penalty fee, especially if you are withdrawing funds from a Pick Your Payout, which has a set withdrawal period). In order to open a new account, most financial institutions will require a minimum deposit or a certain amount of money to be put in the account.
Your income is the money you receive from your employer in exchange for providing a good or service. The income that you earn through wages or salary is the money you can put into savings after expenses and taxes are paid. After these deductions are taken, you’ll receive a direct deposit or check with your take-home earnings.
Interest (or dividends)
Interest is a tricky term because it can refer to something that is charged, as well as something that is earned. Known as interest at many financial institutions and dividends at a credit union, this is the amount you earn on the money you have deposited or saved in a savings, certificate or another deposit account. The other type of interest is the monetary charge for borrowing money from a financial institution. When a person borrows money from their financial institution, they owe the institution the borrowed amount of money plus interest, typically expressed as an annual percentage rate. Interest rates are calculated based on factors such as inflation rate, length of time the money is borrowed, debt-paying ability and risk of default.
Your savings represent the money that you have set aside for a specific purpose or in case of an emergency. Savings are typically built from funds that are left after spending, making payments and after deductions have been taken from earnings. Money that you are saving is considered idle and is meant to be used in case of emergencies or once you reach a savings goal (such as paying for a new TV in cash). Saving is the opposite of investing, so do what you can to protect your savings by not spending or investing it.
A savings account is a deposit account at a financial institution that helps consumers save money while collecting interest. Savings accounts provide a safe and reliable place to keep your money that can be withdrawn to serve any short-term needs. Holding a savings account at the same financial institution as your checking account also offers many advantages in terms of efficiency and convenience.
All this talk about savings vocabulary got you thinking about ways you can save? Check out our blogs on easy ways to save money fast and how to get $1,000 in your savings account in three months to get started today!