The first thing we discussed was what banks actually do with all your money.

Banks leverage the money you deposit into bank accounts to do a number of things:

1.  Banks lend your money to people in need of a loan so that those people can buy things – e.g. a car or a house.

2.  They provide banking services to you.

3.  They buy money-earning investments to earn additional money for the bank to use in a variety of ways – loans, paying employees, offering new services, paying shareholders, etc.

 

Now that we have explained why banks need money, the webinar looked at:

1. What interest is, where it goes and how it works

2. The different ways of calculating interest and the benefits of compound interest

3. Then we will use a case study to prove our point

4. Lastly, we will talk about the Rule of 72

 

A few of the key topics are listed below:

 

We first need to define a few key terms.

 

Borrower: Someone using someone else’s money and receiving something immediately on a promise to return it or its equivalent. 

Lender: Someone allowing someone else to use their money immediately in exchange for a deferred return/repayment.

Borrowers and lenders can be a person or a legal entity such as a bank, a retail store, or a car dealership.

Interest: is the amount of money a borrower is willing to pay a lender for the risk associated with the exchange of goods/services.

APR: APR stands for annual percentage rate of charge. APR is the interest rate for a whole year (annualized), rather than just a monthly interest rate.

Nominal Interest Rate: The interest rate before taking inflation into account (also known as the advertised rate). 

Inflation Rate: The rate at which prices rise and the purchasing value of money falls, causing there to be less money in the system.

Real Interest Rate: The real interest rate (or the real return) an investor, saver or lender receives after taking inflation into account. ​​​​​​​

 

Interest rates play a critical role in the financial markets. So what impacts interest rates?

 

1. Supply & Demand: an increase in the demand for capital will raise interest rates, while a decrease in the demand for capital will decrease them. Conversely, an increase in the supply of capital will reduce interest rates while a decrease in the supply of capital will increase them.

2. Term (length of time): generally speaking, shorter terms pay lower interest rates. Conversely, longer terms typically pay higher interest rates. This is because the lender is without the capital for a longer period of time.

• A savings account pays the lowest amount of interest because it has the shortest term - you can generally put your money in today, and take it all out tomorrow without penalty.
• T-bills generally pay slightly higher interest than a savings account, but your money is locked in for 30 days to 1 year.
• Non-cashable GICs (Guaranteed Investment Certificates) generally pay slightly higher than T-bills, but your money is locked in for at least a year, sometimes longer depending on the term of the investment.

3. Risk: the possibility that the borrower default on the loan (in other words, not pay back the loan).

4.Inflation: Inflation is the rate of goods and services increase in price, leaving less money in the system to spend on other things. It is one of the most important issues as it influences the interest rate we get on our savings and the rate we pay on our mortgages.

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That brings us to the end of the Interest module. If you have any questions or would like to see the full webinar, feel free to contact me at connor.ryan@rbc.com. The next lesson will be on Credit and will be held on Tuesday, February 26th at 6:30 pm. Contact us to register, or fill out the enrollment form on our website.

 

Thank you!

 

Be sure to check out our upcoming financial literacy webinars and other events here.