Calcualte Your Interest
Money market accounts don't pay a fixed
interest rate. That's because the interest rate is based on the yield
of the government and/or
corporate
bonds
held by the money market fund. These funds buy and sell short-term
bonds with maturities that are usually 90 days or less. Consequently,
the fund's holdings are constantly changing and so is the interest
rate. Usually money market rates are updated and interest is calculated
and added to the account balance on a weekly basis.
Learn how interest rates work
for money market accounts. Each week (for most money market accounts),
the fund sets an interest rate. Because the rate is variable, you must
calculate interest on a money market account on a week-by-week basis.
The interest rate is always expressed as an annual rate, so the first
step to calculate interest on a money market account is to divide the
annual rate by 52 (the number of weeks in a year) to find the interest
percentage that will be paid for the week. For example, if the rate for
the week is 5.20 percent, divide 5.20 by 52, which is equal to 0.10
percent.
Determine
the average balance in the money market
account. If there are no deposits or withdrawals, this is the ending
balance from the previous week (which becomes the starting balance for
the current week). If you make a deposit, this increases the average
balance in the account by the amount deposited multiplied by the
percentage of the week the money is in the account. For example, if you
deposit $100 and the money is in the money market account for 4 of the
7 days of the week (57 percent), the average balance increases 57
percent of $100, or $57.
Calculate
the effect of withdrawals on the average balance. The easiest way to do
this is to multiply the amount of the withdrawal by the percentage of
time the money was no longer in the account. For example, if you
withdraw $140 from the account two days before the week ends, the money
is not in the account for two days, or about 28 percent of the time.
Multiply 28 percent by $140 to find how much the withdrawal reduces the
average balance (the answer is $40).
Add the
results from increases in the average balance due to deposits (from
Step 2) to the starting balance. Subtract the decreases resulting from
withdrawals (from Step 3). You now have the average balance in the
account for the week. For example, if your starting balance was $1,000
and you add the $57 from Step 2 and subtract the $40 from Step 3, you
get an average balance of $1,017.
Calculate
interest on a money market account using the weekly interest percentage
(from Step 1) and the average balance (from Step 4). Multiply the
average balance by the weekly percentage to find the amount of
interest. Using our previous examples, multiply 0.10 percent by $1,017,
which comes out to $1.017 (round off to $1.02). The account has earned
$1.02 in interest for the week.
Finish
up by calculating your ending balance for the week. Take the starting
balance, add the total of all deposits, subtract all withdrawals and
then add in the interest earned. Using our example, this is $1,000 plus
$100 (deposits) minus $140 (withdrawals) plus interest ($1.02) for an
ending balance of $961.02 (which will also be the starting balance for
the next week).
If you are
considering Retirement Planning, call for a free consultation today.
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