It is already a known fact that banks make huge profit annually from the different services they provide to their customers. Some believe that these banks use their customers money to enrich themselves.
This brings a very important question to people’s minds, “How can one make money through these banks? You might be thinking of only interest rates, but we know interest do not really amount to much.
This article will enlighten you on the many ways you can make money from your bank and how you can increase you interest.
- Top 10 Ways to Make Money Through Banks
- 10 Easy Ways to Earn Higher Interest
- How to Make The Right Decision on Interests
- 4 Simple Ways to Increase Your Bank Account Balance
- How Much Interest Will You Get on $1000 a Year in a Savings Account?
Top 10 Ways to Make Money Through Banks
1. Get a Job at a Bank
The median annual wage for bank tellers is only about $27,000, but the median wage for the top 10% of workers in this position is closer to $36,000. That’s not too bad for a job that typically only requires a high school diploma.
Also, there are opportunities for advancement. Starting as a teller, you can work your way up to more highly-paid positions, including head teller, supervisor and loan officer, according to MyBankTracker.
2. Invest in Bank Stocks
One way to make money from a bank is to own one, or at least part of one. It’s as easy as buying bank stocks.
Read Also: Best Bank Account Bonuses For You
Consider Wells Fargo (WFC), one of Warren Buffett’s favorites. Five years ago, you could have bought the stock for less than $25 per share, but at the moment the price is over $55.
Not only would you have more than doubled your money, but you would have collected dividends along the way — the stock currently pays about 2.6%.
3. Collect Signup Bonuses
Last year, some people received a $125 bonus for opening a checking account at a local bank. Also, this year some already made $400 in bank account bonuses, and they are aiming for another $400 before the year ends.
Recently, Chase offered $250 for new checking account customers, but these promotions come and go quickly, so that may not be available by the time you read this.
To find current deals like these, search for banks near you using Google Maps (try “banks” and the name of your city). Then search each bank’s name plus “signup bonus” to see what you find. Be careful to read the fine print to be sure you meet all of the qualifications.
4. Go Coin Roll Hunting
The concept is simple enough: Buy rolls of dimes, quarters and half-dollars from the bank and search for coins from before 1965. They are 90% silver, and therefore worth much more than face value. We used to do this as kids and make regular finds of silver coins.
Today, coin roll hunting is still popular. In addition to the silver ones, you can sometimes find coins old enough to have extra value to collectors. But it’s getting harder to find the old coins, so you might not make much for your time.
5. Try Penny Hoarding
Pennies minted prior to 1983 were mostly copper, whereas now they’re mostly zinc. With the price of copper close to $3 per pound, that makes these older pennies worth about two cents each.
Penny hoarders stash them away by the tens of thousands, waiting for the day when they can legally melt them down for their copper value.
You can buy pennies from your bank in $25 boxes (2,500 coins). My recent tests turned up 7% to 15% pre-1983 pennies. You can sell them on eBay for about $135 per $100 face value, but to make this worth your time, you probably have to invest in a penny sorting machine that separates out the older copper cents.
If you are not interested in pennies, you could also choose to hoard nickels.
6. Borrow for a Business
One of the most traditional ways to make money from a bank is to borrow to start a profitable business.
You might want to look for a bank that handles SBA loans. The Small Business Administration guarantees a portion of these loans, so banks are willing to take the risk.
7. Borrow to Flip a House
You found a great fixer-upper you can flip for a profit, but you don’t have the money to buy the house. What can you do? Go to the bank!
It’s been difficult to get a loan to flip a home, but recently the FHA waived its rule against house flipping for its foreclosure sales, so some banks are ready to start loaning on these projects.
Another option for raising the money needed to invest in a fixer-upper is to borrow against your own home, if you have sufficient equity.
8. Buy a Bank Foreclosure
Banks are not only where all the money is, but also where all the homes are — well, at least the deeds. Many banks have a pile of foreclosures they need to sell, and you could fix and sell some of them for a nice profit.
And you may not need as much money as you think to buy one of these bank foreclosures. It all depends on where you live. Detroit’s foreclosed homes start at a few hundred dollars.
9. Get a Credit Card
How do you make money by getting a credit card from your bank? Well, there are those signup bonuses. Then there are points you get for using the cards, which can be converted into cash.
This post on reasons to use credit cards instead of cash looks at how to save money with them too, which is pretty much like making more money.
10. Collect Teaser-Rate Interest
Although interest rates on bank savings accounts are terrible, averaging 0.17% APY. But you can often get a higher “teaser rate” for opening a new bank account.
For example, Everbank pays 1.4% on a money market account and a checking account. That’s eight times the national average. After six months your account will revert to the regular rate (which is still pretty good), but you can move your money to another bank when the time comes.
10 Easy Ways to Earn Higher Interest
The national average savings account pays a paltry 0.1 percent annual percent yield, according to Bankrate data. If you put $10,000 into savings, you would earn $10 in year one.
Luckily, you have plenty of other options that pay 20 times that rate, if not more.
But look past the branch next door. Brick-and-mortar banks generally don’t offer the top rates, so you’ll need to shop around. Check out online banks, community banks and credit unions.
These lesser-known institutions are safe places to park your savings as long as they’re members of the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA) — and most are.
Let us now dive into the 10 easy ways you can increase your interest without taking so much risk in the process.
1. Take Advantage of online banks
You may fear parking your money at an institution without a branch. There is a sense of security in knowing there’s a physical place to visit if something goes wrong, such as a bank outage. Yet, your money is safe in an online bank as long as it is FDIC-insured.
Also, an online bank doesn’t mean you have to sacrifice the ability to speak with humans. Some online banks let you call a representative over the phone 24 hours a day, seven days a week.
Do your homework on any institution that’s new to you. You can research banks with Bankrate’s bank reviews and other ranking of the best online banks. It’s worth your time: Online banks are a good bet for higher yields and perks that pay.
Discover Bank’s Cashback Checking, for example, doesn’t pay interest, but it does pay 1 percent cash back on up to $3,000 in debit card purchases each month.
There are no monthly fees or balance requirements, and account holders have access to more than 60,000 no-fee ATMs in the United States.
2. Consider a rewards checking account
Credit cards aren’t the only financial products offering perks; checking accounts can offer rewards, too.
Rewards checking accounts typically pay higher interest on balances. For example, First Financial Credit Union’s Kasasa Cash checking account pays 2.05 percent APY on balances of $7,500 or less and 0.42 percent APY on balances over $7,500.
Rewards checking accounts may offer other perks, such as sign-up bonuses, cash back on debit card purchases, airline miles and refunds on ATM fees.
For you, the trick is meeting account requirements, such as maintaining a minimum balance, having direct deposit and getting your bank statements online.
Read the disclosures on any rewards account to make sure monthly fees and other costs won’t eat up your rewards.
3. Earn money from bank bonuses
Opening a new account? Check out bank incentives, such as cash bonuses.
Some banks will give you several hundred dollars if you open a new account. Wells Fargo, for example, is currently offering $400 to open an Everyday Checking account online or in a branch.
But you must put direct deposit funds equal to at least $3,000 in your account for three consecutive months, among other things.
Rewards checking account perks and restrictions vary by institution. Some banks offer referral bonuses.
Before making a long-term commitment with a bank that offers a bonus, double-check the interest rate it offers as well as the reviews of its mobile banking app. You may find its standard interest rates to be puny or its mobile banking app to be hard to use.
4. Check out high-interest, low-penalty CDs
Today’s average CD rates are very low. The average one-year CD only pays 0.92 percent APY, according to Bankrate data. Don’t settle for average. Shop around for something better.
One option is Marcus, which is currently offering a one-year CD that earns 2.4 percent APY. To open an account, you must deposit $500 or more.
Before opening an account, pay attention to early withdrawal penalties. If you can withdraw your balance anytime without it costing you a lot, consider moving your money to higher-paying CDs.
But if you need the flexibility, try a no-penalty CD, which allows you to take your money out without the withdrawal fee. For this privilege, you are likely to earn a lower rate, however.
You can also look for a bump-up CD, which gives you the option to increase the CD’s interest rate to a higher level if interest rates rise – usually just once.
5. Switch to a high-interest online savings account
If you prefer to have your cash more liquid than parking it in a CD, consider switching to a high-yield savings account.
While the average savings account APY is low, there are ever-more options that pay 2 percent APY or higher. You won’t get rich, but you will earn more money than if you keep it at an average savings account.
For example, Citi pays 2.36 percent APY on its online savings account, and there is no minimum deposit.
It’s also getting easier to open bank accounts. At some banks and fintech companies, you can open new accounts within minutes.
6. Create a CD ladder
A CD ladder lets you park money in several CDs that mature at different times. The strategy lets you gain access to your money at different intervals so that you can take advantage of higher interest rates.
The difference between yields on top five-year CDs and top short-term CDs (such as six months to two years) currently isn’t sizable, so stick to shorter maturities. For example, you could create a three-rung ladder with six-month, 12-month and 18-month CDs.
To calculate what you could earn in creating a CD ladder, use Bankrate’s calculator.
7. Consider a credit union
In your search to earn a richer rate, don’t forget about credit unions as an option. They can also offer competitive rates.
Credit unions are not-for-profit organizations that are controlled by their members. So, credit unions return profits to members in the form of more favorable interest rates and lower fees.
At Alliant Credit Union, you can earn 2.1 percent APY on its savings account, for instance. You will, however, need to maintain a daily balance of $100 to earn the rate.
It’s getting easier to become a member at credit unions. Qualifying to become a member can be as simple as making a small donation to an affiliated organization.
8. Try a fintech app
You may also want to consider opening a deposit account at a fintech company. Online banks are able to afford paying higher rates because of a cost they don’t have: branches. Same with fintech companies.
Varo Money, for instance, offers a competitive rate: You will get 2.12 percent APY on its savings account and 2.8 percent APY if you meet certain criteria, such as receiving payroll or government direct deposits that total at least $1,000 each month into your account.
In your quest for a new kind of financial provider, pay attention to whether there is FDIC insurance. Some fintech companies partner with banks; others do not.
While Varo Money is vying to become a bank, the neobank currently holds your deposits at its partner bank, The Bancorp Bank. So, your money is protected by its FDIC-insured bank partner.
9. Don’t settle for a low rate
If you’re looking to earn high interest, you’ll probably have to ignore the branch next door.
Brick-and-mortar banks tend to pay less on rates than online banks. Online banks have low overhead costs, so they can afford to pay much higher than the national average.
Right now, the competition for your money is fierce. You can easily open a new high-yield savings account. Make sure to check its mobile bank app rating, however.
If you find a really good deal on a savings account, don’t park your money there and then ignore it. The great rate that lured you could plummet.
Banking relationships don’t have to last for years.
Open an account to take advantage of a good rate. Then do your research again in a year. Expect to move your money around if you want to maximize your earnings potential.
10. Open a money market account
Money market accounts offer some of the advantages of savings accounts – higher yields – with some of the advantages of checking accounts – immediate access to your money.
This blend makes the accounts especially attractive, and you may already have a money market account with your local bank without realizing it. The account is protected by the FDIC as well, if it’s offered by a bank or credit union.
But all accounts are not created equal, and the rates on money market accounts can vary substantially, so it can pay to shop around for the best deal.
If there’s one downside to money market accounts, it’s that they sometimes have more onerous account minimums than traditional savings and checking accounts.
How to Make The Right Decision on Interests
Everyone wants the highest interest rates from their accounts, so what determines which account is right for you often revolves around how soon you need the money.
If you’re able to lock up your money for longer, then you should definitely consider going with a CD, which generally provides higher interest in exchange for leaving your money at the bank.
If you need a down payment or tuition money in two years, for example, you can confidently stash your money into a two-year CD.
You can still get a decent return with a savings or money market account – especially if you go with a high-yield online account – and have some accessibility to your cash, too.
However, regulations limit the number of monthly withdrawals to six, so you don’t want to access it too much.
And if you need ready access to cash at all times, then you’ll want a checking account. The downside, of course, is that these accounts typically pay little in the way of interest, but we’ve highlighted a high-yield option for you above.
With interest rates as low as they have been, you’ll want to look more diligently for higher rates. The good news is that there are many providers and they offer a range of options, so you don’t always have to settle if you’re willing to do a little digging for the best rate.
4 Simple Ways to Increase Your Bank Account Balance
Having money in the bank is great because you can see yourself making progress towards your goals. It’s also a nice buffer for absorbing shocks and surprises without taking on debt.
So, how do you increase your bank account balance, maybe even double your money?
We all know the formula: Save more and spend less. But that knowledge alone is usually not enough to change your behavior without concrete action steps.
Before you get started, it’s wise to think about your goals—the things you want, and why you want them—so you’ll be more motivated to do it.
Pay Yourself First
One of the most important steps to take is prioritizing saving. You probably know exactly how much you spend each month on your rent or mortgage payment—you need to make that payment or you’re out on the street. Can you say the same about the money you put toward your financial security?
To “pay yourself first” means making saving a priority. When you get your paycheck, you may be tempted to pay bills, buy groceries, and spend a little cash, saving what’s left over at the end of the month.
But if you pay yourself first, you put a portion of your pay into savings and then figure out how to live on the rest. A vague desire to save money won’t get you where you want to be; you need to set specific dollar amounts and execute a plan of action—preferably automatic—that works toward that goal. Here are a few steps to take:
- Set up an online savings account and arrange an automatic monthly transfer into that account (start with a few dollars if that’s all you can afford).
- Tell your employer to send a portion of your paycheck to a savings account—not your everyday checking account, where you’ll be tempted to spend it.
- Sign up for your employer’s retirement plan.
- If you use a budget, create a new category for “Monthly Savings.”
Control Your Spending
For most people, the fastest way to save money is to cut costs. It’s also the most painful (and it might not be the most effective if it’s difficult to maintain).
How do you do it? Get a handle on how much you spend. Track your expenses, whether you use a pen and paper, an app, or budgeting software. Don’t put too much energy into picking the “best” system to track your spending—just get started. You can change your mind about the specifics later.
If you have a hard time keeping track of things, spend electronically so that your bank creates a record of every transaction. Pay your bills online, make purchases with a debit card (or better yet, a credit card that you pay off every month), and minimize cash spending. The numbers don’t lie.
Look at where your money goes, and evaluate whether you’re getting what you pay for. Once you’ve taken a hard look at where your money goes, there are plenty of ways to cut costs. You may even decide to downsize your home or car to free up more cash for savings.
Increase Your Income
The flip side of cutting costs is increasing what you bring in, and there are several ways to do it. Unfortunately, it takes time to earn more money, but hopefully, you won’t need to do it forever.
One quick way to earn more is to add part-time work. Taking on another job for a few months or so might give your bank account the boost it needs. Or ask your employer for overtime hours.
You may even look into negotiating your salary or switching jobs to secure a higher paycheck, especially if raises have been paltry or nonexistent at your current job. Keep improving your skills to demonstrate your value to employers if you’d like to move up the career ladder.
If you need a more substantial change and don’t want to depend on bosses to pay you what you’re worth, start your own business. As an entrepreneur, you’ll have more control over your own destiny, as well as more upside potential.
You can manage your risk by starting part-time on the side, and then transition to a full-time gig as things pick up.
On top of working smarter as well as harder, increasing your income can also include selling some belongings, or even renting out a room in your home on Airbnb.
Put Your Money to Work
Once you’ve built up your bank account, start earning more on the money you’ve saved. This won’t make or break you financially, but why leave cash on the table?
Make sure you’re earning a competitive rate on your savings, switching to a high-yield savings account if necessary, and use certificates of deposit (CDs) and money market accounts to earn more interest.
How Much Interest Will You Get on $1000 a Year in a Savings Account?
How do you calculate interest earned on a savings account? It’s actually pretty simple. Find out how much interest $1000 will earn in a year.
If your savings account has an interest rate of 1%, you can earn $10 in interest for one year.
Reduce that interest rate to the national average of 0.07% and you would see $0.70 in interest for the year. You can’t even buy a cup of coffee for that. Fortunately, some banks offer higher interest rates.
Here is a table of how much interest $1,000 will earn in 1, 10, and 20 years at different interest rates:
| Rate | 1 Year | 10 Years | 20 Years |
|---|---|---|---|
| 0.00% | $1,000 | $1,000 | $1,000 |
| 0.25% | $1,003 | $1,025 | $1,051 |
| 0.50% | $1,005 | $1,051 | $1,105 |
| 0.75% | $1,008 | $1,078 | $1,161 |
| 1.00% | $1,010 | $1,105 | $1,220 |
| 1.25% | $1,013 | $1,132 | $1,282 |
| 1.50% | $1,015 | $1,161 | $1,347 |
| 1.75% | $1,018 | $1,189 | $1,415 |
| 2.00% | $1,020 | $1,219 | $1,486 |
| 2.25% | $1,023 | $1,249 | $1,561 |
| 2.50% | $1,025 | $1,280 | $1,639 |
| 2.75% | $1,028 | $1,312 | $1,720 |
| 3.00% | $1,030 | $1,344 | $1,806 |
| 3.25% | $1,033 | $1,377 | $1,896 |
| 3.50% | $1,035 | $1,411 | $1,990 |
| 3.75% | $1,038 | $1,445 | $2,088 |
| 4.00% | $1,040 | $1,480 | $2,191 |
| 4.25% | $1,043 | $1,516 | $2,299 |
| 4.50% | $1,045 | $1,553 | $2,412 |
| 4.75% | $1,048 | $1,591 | $2,530 |
| 5.00% | $1,050 | $1,629 | $2,653 |
| 5.25% | $1,053 | $1,668 | $2,783 |
| 5.50% | $1,055 | $1,708 | $2,918 |
| 5.75% | $1,058 | $1,749 | $3,059 |
| 6.00% | $1,060 | $1,791 | $3,207 |
| 6.25% | $1,063 | $1,834 | $3,362 |
| 6.50% | $1,065 | $1,877 | $3,524 |
| 6.75% | $1,068 | $1,922 | $3,693 |
| 7.00% | $1,070 | $1,967 | $3,870 |
| 7.25% | $1,073 | $2,014 | $4,055 |
| 7.50% | $1,075 | $2,061 | $4,248 |
| 7.75% | $1,078 | $2,109 | $4,450 |
| 8.00% | $1,080 | $2,159 | $4,661 |
| 8.25% | $1,083 | $2,209 | $4,882 |
| 8.50% | $1,085 | $2,261 | $5,112 |
| 8.75% | $1,088 | $2,314 | $5,353 |
| 9.00% | $1,090 | $2,367 | $5,604 |
| 9.25% | $1,093 | $2,422 | $5,867 |
| 9.50% | $1,095 | $2,478 | $6,142 |
| 9.75% | $1,098 | $2,535 | $6,428 |
| 10.00% | $1,100 | $2,594 | $6,727 |
| 10.25% | $1,103 | $2,653 | $7,040 |
| 10.50% | $1,105 | $2,714 | $7,366 |
| 10.75% | $1,108 | $2,776 | $7,707 |
| 11.00% | $1,110 | $2,839 | $8,062 |
| 11.25% | $1,113 | $2,904 | $8,433 |
| 11.50% | $1,115 | $2,970 | $8,821 |
| 11.75% | $1,118 | $3,037 | $9,225 |
| 12.00% | $1,120 | $3,106 | $9,646 |
| 12.25% | $1,123 | $3,176 | $10,086 |
| 12.50% | $1,125 | $3,247 | $10,545 |
| 12.75% | $1,128 | $3,320 | $11,024 |
| 13.00% | $1,130 | $3,395 | $11,523 |
| 13.25% | $1,133 | $3,470 | $12,044 |
| 13.50% | $1,135 | $3,548 | $12,587 |
| 13.75% | $1,138 | $3,627 | $13,153 |
| 14.00% | $1,140 | $3,707 | $13,743 |
| 14.25% | $1,143 | $3,789 | $14,359 |
| 14.50% | $1,145 | $3,873 | $15,001 |
| 14.75% | $1,148 | $3,958 | $15,669 |
| 15.00% | $1,150 | $4,046 | $16,367 |
Interest on Savings Account
Borrowing money comes at a cost: this is called interest. When the time comes to pay the money back, the interest is paid back in addition to the original amount that was borrowed.
When you deposit your money into a savings account, the bank is essentially borrowing your money. The bank then loans your money to borrowers and, in return, it pays you interest for letting it use your money.
How is Interest Calculated?
The formula for calculating the interest you’ll earn from a savings account is as follows:
I = P x R x T
Once you get a grasp of the following terms, it’s simple to use:
- I = Interest. This is the amount of money paid to you by the bank.
- P = Principal. This represents the sum you deposited into your account.
- R = Rate. This is the annual interest rate offered by the bank.
- T = Time. Since we are considering an annual interest rate, time in this case is the number of years that has passed.
As an example, let’s say that you deposit $1,000 into a savings account with an interest rate of 2.0%. If you wanted to figure out how much interest you will earn after one year, you would use the formula as follows:
I = $1,000 x 2% x 1 = $20
Your account balance at the end of the year would then be $1,020.
How Much Interest Does $10,000 Earn?
| Rate | 1 Year | 10 Years | 20 Years |
|---|---|---|---|
| 0.00% | $10,000 | $10,000 | $10,000 |
| 0.25% | $10,025 | $10,253 | $10,512 |
| 0.50% | $10,050 | $10,511 | $11,049 |
| 0.75% | $10,075 | $10,776 | $11,612 |
| 1.00% | $10,100 | $11,046 | $12,202 |
| 1.25% | $10,125 | $11,323 | $12,820 |
| 1.50% | $10,150 | $11,605 | $13,469 |
| 1.75% | $10,175 | $11,894 | $14,148 |
| 2.00% | $10,200 | $12,190 | $14,859 |
| 2.25% | $10,225 | $12,492 | $15,605 |
| 2.50% | $10,250 | $12,801 | $16,386 |
| 2.75% | $10,275 | $13,117 | $17,204 |
| 3.00% | $10,300 | $13,439 | $18,061 |
| 3.25% | $10,325 | $13,769 | $18,958 |
| 3.50% | $10,350 | $14,106 | $19,898 |
| 3.75% | $10,375 | $14,450 | $20,882 |
| 4.00% | $10,400 | $14,802 | $21,911 |
| 4.25% | $10,425 | $15,162 | $22,989 |
| 4.50% | $10,450 | $15,530 | $24,117 |
| 4.75% | $10,475 | $15,905 | $25,298 |
| 5.00% | $10,500 | $16,289 | $26,533 |
| 5.25% | $10,525 | $16,681 | $27,825 |
| 5.50% | $10,550 | $17,081 | $29,178 |
| 5.75% | $10,575 | $17,491 | $30,592 |
| 6.00% | $10,600 | $17,908 | $32,071 |
| 6.25% | $10,625 | $18,335 | $33,619 |
| 6.50% | $10,650 | $18,771 | $35,236 |
| 6.75% | $10,675 | $19,217 | $36,928 |
| 7.00% | $10,700 | $19,672 | $38,697 |
| 7.25% | $10,725 | $20,136 | $40,546 |
| 7.50% | $10,750 | $20,610 | $42,479 |
| 7.75% | $10,775 | $21,095 | $44,499 |
| 8.00% | $10,800 | $21,589 | $46,610 |
| 8.25% | $10,825 | $22,094 | $48,816 |
| 8.50% | $10,850 | $22,610 | $51,120 |
| 8.75% | $10,875 | $23,136 | $53,529 |
| 9.00% | $10,900 | $23,674 | $56,044 |
| 9.25% | $10,925 | $24,222 | $58,672 |
| 9.50% | $10,950 | $24,782 | $61,416 |
| 9.75% | $10,975 | $25,354 | $64,282 |
| 10.00% | $11,000 | $25,937 | $67,275 |
| 10.25% | $11,025 | $26,533 | $70,400 |
| 10.50% | $11,050 | $27,141 | $73,662 |
| 10.75% | $11,075 | $27,761 | $77,068 |
| 11.00% | $11,100 | $28,394 | $80,623 |
| 11.25% | $11,125 | $29,040 | $84,334 |
| 11.50% | $11,150 | $29,699 | $88,206 |
| 11.75% | $11,175 | $30,372 | $92,247 |
| 12.00% | $11,200 | $31,058 | $96,463 |
| 12.25% | $11,225 | $31,759 | $100,862 |
| 12.50% | $11,250 | $32,473 | $105,451 |
| 12.75% | $11,275 | $33,202 | $110,238 |
| 13.00% | $11,300 | $33,946 | $115,231 |
| 13.25% | $11,325 | $34,704 | $120,438 |
| 13.50% | $11,350 | $35,478 | $125,869 |
| 13.75% | $11,375 | $36,267 | $131,531 |
| 14.00% | $11,400 | $37,072 | $137,435 |
| 14.25% | $11,425 | $37,893 | $143,590 |
| 14.50% | $11,450 | $38,731 | $150,006 |
| 14.75% | $11,475 | $39,585 | $156,695 |
| 15.00% | $11,500 | $40,456 | $163,665 |
How Simple Interest Works
Put simply, simple interest is the interest paid on the principal you initially deposit. The above formula calculates simple interest.
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Some specific accounts, like certificates of deposit (CDs) with specific brokers, pay a simple interest rate. However, when you’re considering where to stash your money, consider an account that pays you in compound interest instead.
Below we discuss why compound interest is the way to go.
How Compound Interest Works
With most savings accounts, the interest you earn isn’t just on the money you initially deposit. Most savings accounts use compound interest.
Basically, you earn interest on the interest that you earned the previous month or day, in addition to the interest you earn on your principal.
For example, let’s say you deposit $1,000 into your savings account in January and earn 1% in interest each month. By February, you’d have $1,010.
In March, you’d then earn 1% on $1,010, giving you $1,010.10. The power of compounding interest is that the money grows at an exponential rate.
Ben Franklin’s Compounding Interest Experiment
When Benjamin Franklin passed away, he famously left the city of Philadelphia and the city of Boston $4,400 each in his will. The money was placed in a trust that was required to sit idle for a period of time before it was utilized. Why?
Franklin wanted to harness the power of compounding interest to maximize the funds before the cities could put it to good use. By 1990, the value of those $4,400 investments had ballooned to $6.5 million.
Savings accounts play an important role in your financial health. Using the power of interest, you have the opportunity to see your account balance grow in a savings account.
Combined with regular deposits, a savings account with a good interest rate will set you up for financial success.
