Why Is Interest A Good Thing?

Why is interest a good thing? There are many vehicles for having your extra money earn interest. Interest is the money that you are paid by banks and other entities for allowing them to use your money in various ways.

Persons in financial fields have a saying about making your money work for you. If you have extra money sitting in a regular checking account, why not put it work. There are many vehicles for having your extra money earn interest. Interest is the money that you are paid by banks and other entities for allowing them to use your money in various ways. "Interest on deposit accounts allows customers to increase their wealth without having to invest in other profit making enterprises," says Sharon Lee, the Executive Vice President and Director of Client Services of American National Bank, who has thirty years in the banking industry.


"Before the banking industry got started only wealthy individuals could see their capital grow by investing in businesses. With the development of the modern banking system, anyone can increase his or her wealth by prudent savings and investment plans," said Sharon Lee. Earning interest is a good thing. The original amount of money that you invest is referred to as the principle. Interest earned adds to your principle. Over time and with good investments, your money will earn even more money for you to use for extra purchases, home improvements, college expenses or retirement. Therefore, if the account were set to earn four percent, than for every one dollar in the account, you would earn .04 cents.




Some higher end checking accounts and any savings accounts are interest bearing. The interest rate they earn is expressed as an annual percentage rate or APR. The interest rate earned by the account changes based on the prime rate, which is an index rate. When it changes and the interest is paid on the account is information that you should have when you open the account. Earning interest on your money in a savings account is smart, unless the rate you are getting is less than the tax you will be paying on the interest amount.

Some money market accounts earn tiered interest. The more money in the account, the higher the interest rate and the more money you get. Certificates of deposit or CDs are another good investment vehicle for earning interest if you do not have an immediate need for the money. Earned interest will not do you any good if you cash out early and have to pay penalties.

Individual retirement accounts or IRAs are good places where you want to earn interest. The traditional IRA allows your principle and interest to grow tax-free until you remove the money at retirement. That is called taking a distribution. A Roth IRA lets you put in money that you have already paid taxes on, but the amount grows tax-free at distribution time.

You can find plenty of calculators on the Internet at banking web sites and on government pages. They can help you figure out how much potential interest you can earn, as well as how much principle needed for a goal. When you are shopping for a good savings plan, know that banks and credit unions are different. Interest rates can be different because banks are for profit and credit unions are non-profits that require you to be a member.

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