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Make Your Money Work For You
Your money is an asset, and it should work hard for you in the same way you work hard to earn it. While this may sound very general, there are three components of putting your money to work that you should pay particular attention to:
Your Money Works for You
One of the benefits of "owning money" is that others will pay you for the use of your money. That benefit is called interest. When you deposit money in your financial institution, the institution uses your money to make loans or to make investments. They pay you interest for using your money. They make money by earning more on it than what they are paying you.
The Wonder of Compound Interest
Compound interest is sometimes called one of the wonders of the financial world. Very simply, compound interest just means you earn interest on your interest. The terms "compounded daily", "compounded quarterly" or "compounded annually" simply refer to when the interest is added to the balance and begins earning more interest.
The Rule of 72 is an easy way to estimate relatively accurately the impact of different interest rates over different periods of time. The thing to remember is that money doubles when the interest rate times the number of years equals 72.
While the Rule of 72 will not give you precise results, it is an easy way to get a good estimate in a hurry.
Two simple ideas to put your money to work
Earning the best interest rates you can
Different types of accounts pay different interest rates. Institutions usually base their interest rates on the amount of money in the account and the level of transactions in the account.
Here are some sample interest rates on different types of accounts:
You should try to estimate your liquidity needs (how much money you will need and when you will need it) and then move excess funds to higher earning accounts. Move money you will not need for monthly expenses into your savings account. As your savings account grows and you find that you do not need immediate access to all of it, you can move some funds to higher paying CDs with maturities that match your anticipated spending needs.
Avoiding needless fees and interest costs
After working hard to earn your money and having your money working hard for you, be sure to handle your finances in ways to avoid or reduce as many fees as possible. For example, incurring five $3 fees for using an ATM machine ($15) would entirely offset earning 0.50% interest on a $3,000 balance in a savings account for an entire year.
Fees and charges to avoid