Make Your Money Work For You
February 28, 2013
Your money is an asset, and it should work hard for you in the same way you work hard to earn it. One of the benefits of “owning money” is that others will pay you for the use of your money. That benefit is called interest.
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. When estimating, the thing to remember is that money doubles when the interest rate times the number of years equals 72. For example:
- Money doubles in 6 years at 12%.
- Money doubles in 10.2 years at 7%.
- Money doubles in 12 years at 6%.
- Money doubles in 8 years at 9%.
- Money doubles in 9 years at 8%.
While the Rule of 72 won't give you precise results, it is an easy way to get a good estimate in a hurry.
Putting your money to work
Two simple ideas:
- Use direct deposit to get your paycheck deposited quickly, safely and conveniently.
- Do not have excess money lying around. It will be safer and earning you more money if it is in an account at your financial institution. Apply for an account today.
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 for the account.
- Not all financial institutions offer an interest-bearing checking account. Interest-bearing checking accounts usually pay lower interest rates, but provide the capability for the most transactions. [See Home Federal Bank's iChoose Cash checking account for an interest-bearing checking account.]
- Savings accounts usually pay somewhat higher rates, but with less transaction capabilities. You usually can not write checks against savings accounts or if you can, the number may be limited.
- Certificates of deposit are slightly different. You choose a length of time you are willing to leave your funds deposited and depending on the length, you earn different interest rates. You can cash in your CD early, but will probably be subject to a fee.
- For more information about these and other savings tools, contact Home Federal Bank.
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 to 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 into higher paying CDs with maturities that match your anticipated spending needs.
Home Federal offers Personal Banking, Business Banking, Ag Lending , Home Loans, Trust and Asset Management, and Investments. With so much to offer, learn what Home Federal can do for you.