Knowing Interest Rate Can Get You Rich Fast

11/25/2017 An Do Investment

This article is a 101 introductory guide for beginners to learn the basics of interest rate. If you are an expert in finance, you probably won't find a lot of useful information here. Instead, please check out our Compound Interest Calculator for more advanced calculation using interest rate. Without further ado, let's get started!

What is Interest Rate?

There are many definitions of the interest rate that are used in banking, mortgage loans, auto loans, and other financial branches. Let's assume that the interest rate we are talking about is referring to the percent of principal gained from investing over a period of time. In this case, the Annual Interest Rate is often used to calculate the earning you get from an investment every year.

Still a little confused? Take a look at this example:

A single share of Microsoft stocks was worth $53 at the beginning of 2016. At the end of 2016, it was worth $61. It is safe to say that it gained $8 or 15.09% (8/53×100) in the span of that 1 year. The annual interest rate for Microsoft stocks was 15.09% in 2016.

Check out our Simple Investment Calculator to see interest rate in action!

How to Read Interest Rate?

If you are new to investing, you should definitely do some research on the fund(s) you are about to buy. One key important when looking at an investment is its annual interest rate. Most trading companies that sell investments would display the interest rate for each fund.

Here is a performance snapshot of a fund called VTI from Vanguard.

Notice there are 5 rows for 1 year, 3 year, 5 year, 10 year, and Since inception. The 1 year row shows that this fund has been growing 18.67% for the past 1 year. For 3 year row, the number 10.69% represents the interest rate gained each year for the past 3 years. That means the performance for the past 3 years is 32.07% (10.69×3), for the past 5 years is 70.9% (14.18×5), for the past 10 years is 76.8% (7.68×10).

Interest rate fluctuates based on many factors. When choosing a fund to invest in, you have to consider its past annual interest rate as well as its predicted interest rate in the near or far future. Even if the fund has been rising for many years, there is no guarantee that it will continue to tomorrow.

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