So now that you’ve internalised savings, lets get to the next step. Youv cut your expenses down, and you increased your savings and they are slowly adding up. You look at your account balance every other day in your savings account. Twice a year or maybe once a year your bank pays you an Interest in your account for the money you have there. Interest? What’s that? you say
What is interest?
The interest is what the bank is paying you to use the money that’s sitting in your account. And there are different kinds of accounts that you can keep your money in, in India. There’s what most of us have called a Savings Account. A Savings account is where you put your excess cash, you maintain a certain minimum balance, the bank gives you some services that are bundled in ( atm card, cheque book) and you get paid interest on the amount that’s sitting in your account. Typical Interest rates are hovering around 3.5 to 4% on a normal savings account. You also have variants of savings account, where the bank might give you some additional benefits eg. Banks offer salary accounts to companies where they don penalize you if your balance is zero.
Then we have Current Accounts or as the Americans call it checking accounts. These are Business accounts that are geared towards people or businesses with higher number of transactions. Usually there is no interest paid on any amount sitting in a current account. But his is made up for with a greater number of transactions you can carry out with a current account. Proprietorships might have such an account as also other businesses.
The Advantage of these kind of accounts is you have ready access to your money at anytime you need ( as long as the banks are open, or you have acces to an ATM). So its liquid.
If your moneys sitting in a savings account your getting a tiny additional trickle coming in per year. So lets have a look at the numbers
Lets take an example.
Youv saved up 81,600 and leave it in your savings account @3.5 %
P(principal)=81,600 T(time)=1 year I(interest)=2,856
At the end of the next year your account balance increases to 84,456
Not a lot na. I know . but lets say you saved up the same amount over the period of this year as well the starting balance In you account will now become 84,456+81600=1,66,056
So at the end of the 3rd year, you generate an interest of 5811.96 Taking your stash to 1,71,867
You see where I’m going with this. This is how returns on investment or interest earned makes you money in the long run. in fact here’s a quote from one of the brightest brains in recorded history.
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. Compound interest is the most powerful force in the universe. Compound interest is the greatest mathematical discovery of all time.Albert Einstein
Woho, life’s good and you can continue to buy your freedom from your job one month at a time by saving a part of your salary. You can also spend the money on buying things. A car, a house ( after a lot of saving) a guitar, a laptop. The freedom of having money gives you is endless, but is all the stuff that you buy born equal?. What if I told you, you could buy stuff that makes you more money. In the next couple of parts in this series, let’s look at the concepts of Spending / Investing. Well also discuss the concepts used by Robert Kiyosaki in his book Rich Dad Poor Dad. The concept of Assets and Liabilities.