← Money Foundations · lesson 7 of 10
By the end of this one you'll know what interest is, what APY stands for, and how to tell rent you collect from rent you pay.
Interest is rent paid for using somebody else's money, that's the whole word. When a neighbor boards his horse in my barn, he pays me for the stall every month. A bank works the same way, when it holds your savings it's boarding your dollars, and it pays you a little stall rent because it puts those dollars to work while they sit there. Flip it around and the same rule holds, when you carry a balance on a credit card, now you're the renter, you borrowed the bank's money and the stall rent lands on you. APY stands for annual percentage yield, and it's just the honest yearly rent number with compounding included, meaning the rent your rent earns is already baked in. So 4 percent APY means 100 dollars boarded for a full year collects about 4 dollars. Same barn, same rule, the only question that ever matters is who owns the horse.
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example, 100 dollars sits in a savings account paying 4 percent APY, so a year of stall rent comes to about 4 dollars, roughly 33 cents a month.
Now the flip side, 100 dollars carried on a credit card charging 24 percent costs about 24 dollars in rent over a year if it just sits there unpaid.
Collecting 4 or paying 24, those are the two ends of the same barn.
The mechanic calls: the brakes are shot, 400 dollars, and the van is how everyone gets everywhere. There's 500 in a savings account paying 4 percent, and a credit card in your wallet charging 24.
Pick your move. Then peek at the other roads if you're curious.
Interest is just rent paid for using money, and the only question that ever matters is which side of the rent you're standing on.