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Well, in the gardening sense, yes. But by saving and investing your money, you can grow $10 into $12, $20, or even $100 or more over time!
INTEREST takes the idea of saving and adds more power to it. Adding interest to your money is like adding fertilizer to a plant – it helps it grow!
Interest is a fee or amount that you receive when you lend money to a person, company or institution. If you put money into a savings account at a bank, the bank pays you interest for allowing them to us your money. That’s right – they pay you! Cool!
Simple interest is based on a percentage only of the original loan amount, called the principal.
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If you lend your friend Fred $100 and charge five percent (5%) simple interest each month, when Fred pays you back in a month, he would pay you $105 – that’s the $100 plus the $5 in interest. If he paid you back TWO months later, you would get $110 – that’s the original $100 PLUS $5 in interest for each month.
How much would you have if Fred paid back the loan
one year later? ANSWER
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Compound interest – now this is where money growth really picks up – is what happens when interest is charged on the original loan amount, plus on the interest you have already earned.
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Let’s say you loan a bank some money by opening a savings account. You start out with $100 and a compound interest rate of five percent (5%) per month. After the first month, your $100 would earn $5, and you would have $105 in your savings account. After the second month, you would earn $5.25, for a total of $110.25. How so? Because each month, the interest is calculated based on the total amount in the account – the original $100 plus
the $5 in interest you earned previously. So the $5.25 is actually 5 percent of $105.
The third month, you would earn $5.51, and you’d have $115.76. So after just three months, you would
have earned a total of $15.76 in compound interest on your original $100.
How much do you think you’d have after one year? ANSWER
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Investing is annother way to grow money. When you invest, it’s like spending money to make money. You spend the money on stocks, bonds, mutual funds, or even collectibles (like Beanie Babies or Pokemon cards!) – items you think will increase in value over time.
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To see how this works, check out Show Me the Money, an interactive chart that shows you the amount and speed your money could grow in different types of investments.
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