Percentages are the language of money. Whether you're saving for retirement or paying off debt, understanding how percentages work is the single most important skill for financial literacy.
The 50/30/20 Budgeting Rule
One of the most popular budgeting methods relies entirely on percentages. Popularized by Senator Elizabeth Warren, it suggests dividing your after-tax income into three buckets:
APR vs. APY: What's the Difference?
You'll often see these two acronyms when looking at bank accounts or loans. They both refer to interest expressed as a percentage, but they measure it differently.
- APR (Annual Percentage Rate): The simple interest rate charged per year. It does not take compounding into account. This is usually used for debt (mortgages, credit cards).
- APY (Annual Percentage Yield): The real rate of return earned on savings, taking into account the effect of compounding interest. This is usually used for investments and savings accounts.
Tip: When borrowing, look for a lower APR. When saving, look for a higher APY.
The Magic of Compound Interest
Albert Einstein reputedly called compound interest the "eighth wonder of the world." It's the principle that you earn interest not just on your initial principal, but also on the accumulated interest from previous periods.
A 7% annual return might not sound like much, but thanks to compounding, your money would double approximately every 10 years (Rule of 72). This is why starting to save early—even small percentages of your income—is so powerful.