Podcast Episode - Suze School: Understand How Interest Really Works

Interest Rates, Saving, Savings, Savings Account

March 05, 2023

Listen to Podcast Episode:

This Suze School podcast is a great lesson about interest rates and how they work.  Get out your Suze Notebooks and learn about APY, compounding, dividend yield and interest and more. 

Podcast Transcript:

Suze: March 5th 2023 Suze O here, and welcome everybody to the Women and Money Podcast. As well as everybody smart enough to listen. We are going straight away to Suze School. So you are to take out your Suze notebooks along with a pen or a pencil. Do people even use pencils anymore?

Suze: I'm not used to pencil and I don't even know how long anyway that's besides the point. And I want you to write down today's Suze School

Suze: as we go along because too many of you are not understanding how money works when you invest it in a savings account or a certificate of deposit or a Series I Bond or a Treasury Bill Bond or Note or anything like that.

Suze: So you are getting confused and because you are getting confused, you are going to be making serious mistakes. So, are you ready? Let's begin.

Suze: The very first thing I want you to write down

Suze: are the letters A P Y

Suze: And those three letters stand for annual percentage yield, write that down, annual percentage yield.

Suze: And now I want you to underline the word annual

Suze: and I want you to think about what does that word mean?

Suze: That word means annual on a yearly basis, percentage yield. What do those words mean? That in one year on an annual basis,

Suze: the percentage that your money would yield you is whatever the investment that you made is quoted at. For instance, let's just assume you have $10,000 that you want to invest. And let's say that $10,000,

Suze: maybe is at a savings account somewhere making for you 3%. Let's just say that's true. And that 3% is APY.

Suze: How much would you make on that? $10,000 if the interest rate did not change over the year period of time and you just left it in there?

Suze: You would be making $300 in one year.

Suze: We all got that? How much, however, if you put in $10,000 into a savings account paying you 3% A P Y and six months from now, you decided, you know what, I'm taking all my money out to do something else with it. How much would you earn?

Suze: You would earn $150 approximately,

Suze: in a three-month period of time. Do you understand what's happening here? You would probably only earn $75 in interest on a $10,000 deposit.

Suze: So it's important for you to understand,

Suze: is that you get a portion of that 3% APY. It's based on the amount of time that your money has actually been invested.

Suze: But it's still based on if it had stayed in there for an entire year, that it would have earned an actual 3% or in this case, $300.

Suze: So you have to really get that because what's important when it comes to investing is that there's like a universal language that everybody understands. If they left their money in for a year, this is how much they would get

Suze: because no financial institution knows in advance. Are you going to leave it in there for three months? Are you going to leave it in there for five months? What are you going to do with it? So it's all based on an A P Y and the actual interest rate that you earn is also based on the amount of time that it is in that investment.

Suze: One other word that I want you to write down

Suze: and that word is compound interest,

Suze: compound interest

Suze: when you invest money or when you put money into a savings account or a certificate or a treasury, whatever it may be

Suze: and the interest that the money that you deposited stays in that account

Suze: and that money earns interest. So you make a deposit of, let's just say $10,000 and now that $10,000 earned interest for that month,

Suze: the interest that it earned is still in the account. So now that money, that interest earns interest that's known as compound interest.

Suze: Did you write all of those down? Let's now go on to the three and six month certificates that Alliant Credit Union started to offer last Sunday to tremendous success by the way,

Suze: and to find out more about the three and six month certificates with Alliant Credit Union, you would just go to My Alliant A L L I A N T dot com slash Ultimate. Because again, on the Women and Money podcast, it really is the only place that we're letting people know about the certificates because the rates are so high. All right, let's continue.

Suze: So... I need you to write these numbers down.

Suze: The three month certificate

Suze: offers a dividend yield of 4.75%

Suze: and an A P Y of 4.85%. The six month certificate offers a dividend yield of 4.89%

Suze: But the APY is 5%. Do you understand the difference between the dividend yield

Suze: and the A P Y?

Suze: And chances are you do not.

Suze: So again, let's add another definition

Suze: on our little Suze Notebook

Suze: Dividend yield

Suze: is the actual interest rate

Suze: that you will be earning on the certificates. Now, these certificates with Alliant Credit Union, you have the ability to take out the interest or the dividend yield and they're just calling it that because they're certificates. And that's what credit unions, that's their lingo that they use. So the interest or the dividend yield

Suze: that you are able to earn on the three month or the six month certificate can be withdrawn for income every single month if you want to. And Alliant Credit Union does not know if you are going to be withdrawing that interest or dividend yield or if you're just going to leave it in there.

Suze: If you just leave your dividend yield in there, the interest that you're making in there

Suze: and now that interest starts to compound, we learned what that means, that interest starts to make interest, then your annual percentage yield will be 4.85%, on the three month or 5% annual percentage yield on the six month. However,

Suze: go back again to what I started to teach you today, which was annual percentage yield. That does not mean that at the end of three months, assuming you invested $10,000, that at the end of three months, you're going to earn $485 or if you purchased the six-month certificate

Suze: at a 5% annual yield, assuming again, you're leaving the interest or the dividend in there. It does not mean at the end of six months you're going to earn $500. No. And why is that?

Suze: Because you didn't leave it in there for a year and interest rates are quoted on an annual percentage yield.

Suze: So do not mix that up. There is no place that you can invest money

Suze: that is not quoted as an annual percentage yield.

Suze: So for those of you who keep thinking that you are making more money in your bank accounts or your money market accounts, wherever your money happens to be,

Suze: than you would in a three or six month certificate, you are not calculating correctly

Suze: and you really need to understand that big time

Suze: Again, the interest rates that Alliant is offering are fabulous interest rates right now. So for those of you, seriously, you have money at other bank accounts, at other credit unions. Any place, this is savings money, this is money that you really don't think you're going to need. You just want to get the highest interest rate on it.

Suze: You need to think about where should you be transferring that money to get the highest possible interest that you can get. Once again, I am going to repeat. I personally think interest rates are going to continue to go up and I would not be going out more than six months at this point in time.

Suze: Are we all clear on this lesson today

Suze: as to how an A P Y works and how compounding works? Those are the things that you seriously need to understand. Next.

Suze: The biggest difference between a certificate of deposit and a Treasury, whether it's a Treasury bill

Suze: and a Treasury bill has a maturity of one year or less. A Treasury note is to, to essentially 10 years and a Treasury bond is 20 or 30 years. The main difference between a tTreasury instrument, whether it's a Treasury Bill Bonder Note or a Series I bond or Series EE bonds or whatever they may be,

Suze: And any other investment such as a certificate of deposit or interest rates that you make on savings accounts or money market accounts. The biggest difference between those two

Suze: is that whenever you buy a Treasury, you do not have to pay state income tax on that money. However, with certificates and money market accounts, you not only pay taxes on the federal level, you will also, if you live in a state

Suze: that charges state income tax, also pay tax on a state level as well. In a Treasury, you only pay income tax on the federal level. Now, for many of you, that's not a really big deal.

Suze: Maybe you're not in a very high tax bracket at all or you happen to live in a state where you hardly have any state income tax. So none of that affects you.

Suze: But if you happen to live in California or Hawaii or states where it's at 13%, state income tax or 11% or states really, that are high and you can look it up, go and look at what is the state-income tax based on your income that you pay?

Suze: And then you'll know, are you better off buying a Treasury versus a certificate?

Suze: And it's really just that simple. So I can outright tell you that in the majority of cases if you live in places like New York, New Jersey, Georgia, Hawaii, especially California. Nine out of 10 of the times you are better off buying a Treasury bill than a certificate.

Suze: Alright, everybody?

Suze: There's also something you need to understand which is there's a difference between savings and investments for the long run and in an emergency savings fund.

Suze: Most of you for an emergency savings fund or account want to know that you can get at your money at any time.

Suze: And that's why many of you put your eight month or 12-month emergency savings fund in the Ultimate Opportunity Savings account or wherever you may happen to do so.

Suze: But for many of you, you truly just don't want to get complicated. You just want your savings account money to be liquid in case you need more than three months or six months at one time, you just want liquid money. You do not want to tie it up. New word: liquid, write it down.

Suze: Liquid means you can get at it anytime you want without a penalty.

Suze: So you want to know that oh, you have 10 or 15,000 or 20,000 or whatever it may be in the Ultimate Opportunity Savings account at 3.10% and you just want to know that you can get at it tomorrow,

Suze: all of it, you leave it there, you just leave it there or wherever you happen to have it. If, however you know that you can tie up this money for three months or six months or whatever. And it makes sense depending on the state that you live in and, or your own income tax bracket, even if you live in a state that has state income taxes,

Suze: but you're not really paying any because you're not really making any money and you just want it to be very simple for you.

Suze: And maybe you have money sitting in a bank account somewhere paying you 0.6% or whatever it is.

Suze: Then you might want to take advantage of the three and six month certificates that Alliant Credit Union is offering.

Suze: Let's talk about maturity dates and what they mean to you, write it down. A maturity date,

Suze: when you purchase a three month certificate or a six month certificate.

Suze: In this case with Alliant Credit Union in three months, that certificate matures all of the money plus the interest that it earned is your money to do whatever you want with without any penalties whatsoever.

Suze: It's your choice if you want to renew it and buy another three month certificate or at that time, a six month certificate, or do you want your money to go back into your savings account or any account that you might have at Alliant to do whatever you want with up to you. So when you see a maturity date,

Suze: whether it's three months, six months, one year or two years, that is the amount of time that your investment is essentially tied up,

Suze: it can go up and down in value. If it's a treasury, there will be possible penalties of three months of interest if you come out before the maturity date of the certificates. So you know, when you can get at this money without any penalties or fluctuation in your principal, what so ever

Suze: Your maturity dates should be chosen according to not what the interest rate is paying, but two things when you think you may want access to that money penalty free.

Suze: And do you think that interest rates are going to go higher in the future? So you want that money to mature? So you could possibly invest it at a higher interest rate.

Suze: Those are the two things that you need to take into consideration

Suze: when deciding on what maturity date do you want.

Suze: These are the things that are important for you to really understand in Suze School? All right.

Suze: Until Thursday, there's really only one thing that I want you to say every single day. Come on repeat it with me today. Wherever I go, I will create a more peaceful, joyful and loving world. And everybody, this world needs that to come true more than it's ever needed it before.

Suze: So if you can just do that,

Suze: I promise you you will be unstoppable.

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