You've just paid off the minivan, got the dog fixed and Christmas is months away. Life is perfect. Now what are you going to do with all that extra cash? You could buy a new sound system or take a trip to Cancún. But have you considered putting your money to work?
Money making money is the whole idea behind interest
Money making money is the whole idea behind interest. Whether you stick your cash into savings accounts, buy stocks or lend it to your brother at 10 percent, interest is the cost paid for the use of money.
Almost everyone has had experience with traditional savings accounts. Many of us remember our father or mother taking us to their bank when we were children and opening our first savings account. My dad told me that the cash in my savings account would grow like magic.
How does it work?
It really does take money to make money. A new company that needs cash to get off the ground may borrow capital from investors, with the agreement to pay it back, plus a sum equal to a certain percentage of the money borrowed.
Confused? Let's use another example. Monte Money-Bucks lends $50,000 to his sister for a catering business she wants to start. She agrees to pay it back in three years at 10 percent interest. This means that when the three years are up, she will owe Monte $65,000—the $50,000 plus an additional $15,000 of interest.
Normal people and interest
Few of us have $50,000 to invest, but let's suppose you open a savings account with $5000 that earns 1 percent interest. In two years, your money will have earned you $100 in interest. Not a bad way to pick up some extra cash. But maybe you can do better.
Banks offer other plans, besides savings accounts, that pay even more interest. Some CD accounts, for example, will pay 4 percent if you leave your money untouched for three years. In three years, $5,000 would gather $600 in interest at that rate. And that's only the beginning.
Many financial institutions pay what's called compound interest. This means that they pay interest on the amount of money you deposit (the principal) plus the amount of interest they have already paid you.
In the savings example of the $5000 at 1 percent interest over two years you would make an additional $0.50. That may not seem like a lot, but it's better than nothing.
How to get from here to there
Many consumers keep savings accounts and pay high interest rates on their loans. If this applies to you, maybe you should take a look at what is available to you. If you are earning a low interest rate on a bank savings account and paying 15 percent or more on your loans, wouldn't you be putting your money to better use by paying off your debt?
If you have a low interest earning account and your credit reports have questionable listings on them, you may consider using some of that savings money to hire a professional credit restoration firm to assist you in improving your credit rating and thereby lower the interest you pay on your present loans.
You can start by ordering your credit reports and determining what needs to be done.