Today, I will discuss interest. But first, let me introduce myself.
Hi! I am a mom focusing on inspiring those who are ages 30 and under. I want my child and you to have a life moving toward financial understanding starting at an early age so that you can have the best life possible.
More Money, More Options. Increased Prosperity. Increased Generosity. A Better Future for the World.
As you improve your financial literacy, you need to grow your knowledge of financial terms.
So, let’s dive into our first question…
What is interest?
Interest is the money that is paid for borrowing and using someone else’s money. It is essentially money that is paid for “renting” the money. It is usually expressed as an annual percentage rate (APR). People pay the borrowing rate on money owed on their credit cards. Banks pay it on people’s money held in their banks.
What is an example of interest?
Here is an example: If a person wants to buy a car, but doesn’t have all of the money to pay for it, the person might borrow the money from a bank.
The bank would charge the borrower money. That means that, in addition to paying the money borrowed back to the bank, the borrower will pay extra money back to the bank. This extra money is the interest.
Who Pays Interest?
If you borrow money, you pay interest. If you lend money, you charge and receive interest.
Here are some examples of who pays:
- People who take out loans and mortgages pay interest.
- Banks that hold money in savings accounts pay interest to the account holders.
If you are looking for a bank where you can earn higher than the average, try an online bank. At the time that I am writing this, the highest interest offered for savings that I know of is, CIT Bank.
Why do we pay interest?
Borrowers pay interest for the right to use someone else’s money.
By being able to use someone else’s money, the borrower does not have to wait until they are able to save the money.
When money is borrowed, the lender does not have access to the money when the borrower has it.
Also, the lender has the risk of not getting the money returned. So, the borrower pays money for the lender’s risk and the lender’s lack of access to the money.
What is interest income?
Interest income is the money earned on money held in things like savings accounts and certificates of deposit (CDs).
In the case of these two examples, the bank pays the customers. When you put money into a bank via a savings account or certificate of deposit, you are lending the bank your money. So, your interest income is the money that they are paying you, to borrow your money.
When an individual pays interest on a bank loan, that money paid is interest income for the bank. If you have money to put into the bank and leave for a while, you can earn some of this type of income.
Key Takeaways
- Interest is the money that is paid for borrowing and using someone else’s money.
- An example of interest is when you take out a loan for something (such as a car), you pay back the money that you borrow plus extra money (which is the interest.)
- The person or entity that uses someone else’s money pays interest.
- We pay interest for the right to use someone else’s money, since they will not be able to use the money.
- Interest income is the extra money (beyond the amount borrowed), received by the lender.
Do you want to read more of a mom’s letters written to inspire financial independence by age 30? Check out:
What Is a CD? It’s Not Just Something to Play Music
Earn As Much Interest as Possible
Looking for financial resources? Check out the Rich Mom Poor Kid Resources Page.
I hope this is helpful.
Hugs,
Rich Mom
About Rich Mom
My name is Valerie, aka “Rich Mom.” My passion is personal finance. Rich Mom Answers is a segment of the Rich Mom, Poor Kid blog that gives short answers to my daughter’s personal finance questions.The goal of Rich Mom Answers is to teach her the vocabulary of financial literacy and to answer as many of the common questions that come up when thinking about personal finances.
As a mother with a masters degree and majors in business and economics, I started sharing these bits of financial information in order to encourage my daughter (aka Poor Kid), because I want her to get better with her finances and know how to create her own wealth. I want her to live a different kind of life, where at some point, she will not need to trade her time for money.
What Does Wealth Do?
Wealth gives us choices and freedom. Wealth allows us to be generous and help others. I want her to know how to kick a**, build wealth, and use her time having a beautiful free and generous life. Sharing this information with her friends, and you, I am hoping to increase my impact. I hope that your generation can get to the point where you can have the option of trading time for money. But, you need a plan. The intended audience is people ages 30 and under or financial literacy beginners. My goal is to encourage others to take control of their own finances, so that they can make better decisions, move toward financial freedom, and also hopefully have free and beautiful lives.
The information shared here is not intended as financial advice, just entertainment and encouragement.
Would you like to learn more? Check out:
What is Compound Interest?
What is a CD? It’s Not Just Something You Play
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