Many kids are told to save their money but no one tells them why. Adults don’t think about it much either but the reality is we should all be aware of why we save and how we can get the most out of our savings.
One of the things that affects our savings the most is the way we receive interest on our money. Interest comes in two ways – simple interest and compound interest.
Simple interest is when you save money and interest is only paid on the original amount put into the account to begin with (called the principal).
Compound interest is the most powerful. When you’re saving, the bank (or financial institution) adds interest to your savings at regular intervals (for example, every month). If you don’t touch the interest, but let it add to your lump sum, then you start to earn interest on your interest, as well as on the original amount you saved.
When it comes to paying interest, look at paying interest as an unfair enemy. He never rests. You can work 40, 50 or 60 hours a week to keep up with him, but he works 24 hours, 7 days a week to keep ahead of you. He never stops for a morning tea, lunch or dinner break and works every weekend, every public holiday, and every night. He is relentless. He will even take your money if you lose your job or when you are sick in bed. If you miss too many payments, he will take your house or car and give you a bad credit rating too. If he gives you a bad credit rating then next time you want to use him he will charge you a higher rate for the privilege so he can work even harder against you so your money disappears without a trace even quicker.
Receiving interest on the other hand Interest can become a wonderful friend if you are the saver. Instead of being in the interest trap, interest is working just as hard for you as it used to work against you. Twenty four hours a day, seven days a week, it is earning money for you. It works weekends, holidays, and nights. It never takes a day off, a lunch or dinner break, and it earns just as much for you on the days when you are sick, when you are well, laying on the beach, fishing, etc as when you are working. So when you are receiving interest instead of paying it you have made the first step to earning passive income which is income that you didn’t have to actively work for. Passive income is the quickest way to become financially independent.
Interest is only interesting when you are getting it. Get interested in your interest