What Is Interest, and How Does It Help You Make Money?


Most people dream about making money without ever having to work. While the probability of winning the lottery or randomly gaining a massive inheritance is slim to none, there is, in fact, a real, legal way to sit on your duff and generate some income.

It’s called interest. No, it’s not alchemy. It’s a simple economic principle that lets institutions and people who lend money make a profit from their transactions, while simultaneously letting bank customers and bond investors make the same profit for their contributions.

Sounds confusing? Watch this amazingly informative video from Wall Street Survivor to learn how interest works…and how it can help your money earn moremoney!

How can you earn interest? To start, your savings or money market account will earn you interest, but not a whole lot.

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Flickr/401(K) 2012

Since the Fed rate is near zero, interest rates on interest-accruing bank accounts are fairly low. Savings accounts are insured up to $100,000 from the FDIC. Money Market accounts are not FDIC-insured, and can be lost if a bank or financial institution goes under.

A bond generally earns the most interest, but take years, if not decades, to mature and fully realize its maximum interest.

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Flickr/Michael Kelley

The only way you can lose money with your bond, however, is if you sell your bond for less than you paid for it, or if the institution issuing the bond defaults on it.

Stocks can’t earn interest. They only earn from gains and dividends.

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Flickr/Doc Chewbacca

You can also lose money through stocks.

If you’re at a relatively young age (read: below 50) and still working full-time, it’s suggested that you invest more in stocks than bonds.

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Wikimedia Commons

Since they can go down in value, stocks are a lot riskier than bonds and don’t generate interest, but their gains can be much higher than any interest earned on a bond, and in a much shorter period of time.

When you’re older and/or on a fixed income, it’s suggested that you sell the bulk of your stocks and invest in bonds.

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Shutterstock

You won’t get the massive growth that can come with stocks, but you can safely invest in bonds with almost no risk and a fixed amount of interest.


These guidelines aren’t set in stone. I personally own stocks and bonds to achieve a diverse portfolio. I have both guaranteed interest from my bonds, along with some sweet gains from a few good stock purchases. After all, you should only invest in whatever you’re comfortable with.

Share this story with your friends below, and help them figure out why they have an extra 11 cents in their savings account!