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How to Make Money by Doing Nothing
If your mother told you "money doesn’t grow on trees," she’s right. But…money can grow LIKE trees. Think about this: If you put $100 in a shoe box and put it under your bed, one year from now when you pull it out you’ll have $100. That’s assuming your little brother doesn’t get to it first. Now, take that same $100 and put it in a bank account. First, your money is much safer because your brother can’t get to it, and the federal government insures your deposit in case anything happens to the bank. Second, the bank pays you just for keeping the money in an account.
By doing nothing but putting your money in a bank account, you can make more money because banks pay interest on deposits. Interest is an amount the bank pays you each year for the use of your money while it’s in your account, and it’s based on a percentage of your balance.
For instance, if you were to take your $100 and put it in an account that offers 6% interest, by the end of the year the bank will have given you $6. ($100 x .06 = $6.) So, without doing anything, your savings has grown to $106.
Compound Interest
In the above example, earning $6 over the course of a year may not seem like much. But over time it can add up very quickly thanks to a powerful tool known as compound interest. Put very simply, compound interest is interest earned on interest.
Look again at your $100 earning 6% interest. The $106 you have after the first year would earn 6% again the next year, which would mean the second year you would earn $6.36, or a 36 cent increase. ($106 x .06 = $6.36) Now you have $112.36. ($106 + $6.36 = $112.36) And that new total will then earn 6% the following year, and so on, and so on, and so on.
If you left that same $100 in a 6% interest account for 40 years, you’d have $1,028, and your annual interest earnings would be more than $50 per year.
No you see how starting early and allowing your interest to compound can add up in the long run. Money may not grown ON trees, but with compound interest it can grow LIKE trees.
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