Making Money the Boring Way: Interest Rates

Life, Money and Gratitude # 9 Making Money the Boring Way: Interest Rates

"He who understands it, earns it. He who doesn’t, pays it" Albert Einstein

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The 8th Wonder of the World

One of the least exciting but one of the potentially most profitable ways to make money is collecting interest. Making Money the Boring Way: Interest Rates

Interest rates are simply a fraction, like 5/100 which equals 5% or .05 in decimals.

Let’s use a simple example to demonstrate the power of interest.

You have $100 that you deposit into a savings account and the bank is paying 5%interest APY (Annual Percentage Yield).

$100 x .05 (5%) = $5, the interest you will make over the course of one year.

Compounding is where the real power is.

Compounding is the adding of what you earned ($5) to what you already have ($100) and adding more interest to that.

$100 + $5 = $105 (Deposit + Interest)

Compound That

$105 (your new balance) x .05 (5% interest rate) = $5.25

New Balance

$105 + $5.25 = $110.25

Compound That

$110.25 (your new balance) x .05 (5% interest rate)= $5.51

New Balance

$110.25 + $5.51 = $115.76

This process will grow your money year over year.

Could it grow faster? Yes.

If you increase the interest rate or how often the compounding happens.

Imagine if the interest rate was 10% or the compounding was added every month or every week, the amount of your money would get bigger and bigger.

Albert Einstein once said, “Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

So, one of the simplest ways to make money is collecting interest and compounding that over and over.

The sad part is that most Interest Rates at a bank are lower than inflation and that forces you into the Wall Street investment world to get a higher rate, which is very different from collecting simple interest.

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Piddly (very little) Money

Join me back in my adventures in banking.

I’m in college (1990) and I have opened my first bank account and received my first credit card. The smiling people (salesman) at the bank have convinced me that I should also open a savings account, which I do. Over time I put some money into the account, and it starts to grow.

This makes me smile, the banker had used the analogy of planting seeds for a tree and over time the tree would grow, and I would be able to enjoy the shade of the tree, as well as the fruit, if it was a fruit tree. I like trees, I like fruit, and I like growing my money.

A year or so goes by and I’m looking at my bank statement and trying to figure out how much interest I’ve earned. I run my finger down the column to where the “earned income” line is, and I am dumbfounded at what a small piddly amount of money it is. I think to myself, geez, I’ll be dead before this tree grows.

This gets me thinking that I’ve got to come up with some other ways to make money.

Hmmm, I’m still in school and I’ve been told that if I do well, when I get out I’ll be able to make more money. I have an inkling of doubt about this, but it’s what I’ve been told, so I carry on with my studies.

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Average Bank Interest Rates

Interest rates change all the time, they go up and down depending on what the central bank in your country thinks the rate should be. The article, that I link below, about interest rates by Stephanie Vozza written in March 2022 has different rates than today. The Federal Reserve (US central bank) has drastically increased the interest rates this year to battle inflation. Inflation is high because the Federal Reserve printed money, it's a strange system. The article Average Bank Interest Rates is still worth reading and is linked below.

Average Bank Interest Rates

Until next time, God Bless and be well.

M. Joseph Benric is the author of Graduation Gift , A Step-By-Step Guide to Financial Literacy for Young Adults