How earn out of what your money earns

Nowadays, a full-time employed person’s salary is not enough to cover the daily-to-monthly expenses. Some people invests in multi-level marketing (MLM), a popular home-based entrepreneurship that a lot of people has been successful. Not all are legit but most of them are. You need to be persuasive enough but not annoying as to be able to entice potential clients to buy. Some use social media networking sites such as Facebook and Twitter. They post their products, and sometimes their achievements but most of the time, other people’s exploits.

If you’re not into selling, here’s a simple workaround for you to earn extra money. It may take some time but it will never fail – opening a savings account. But how would your money earn if you just keep it in a bank? The answer is interest.

In banking terms, interest is what the bank pays you for using the money you entrust them by lending it to other people as loan or credit (either cards or overdrafts).

APR VS APY

Some banks lend your money to other people and shows them the APR (annual percentage rate). The APR is the annual rate of the interest, simple as that (i.e., if monthly rate is 1%, then the APR is 1×12 = 12% APR). But what you don’t see is that the interest compounds monthly (most of the time). This is where APY (annual percentage yield) comes into play. APY will be explained later in this article.

If your balance stays on your card for a month, your interest will be equivalent to 12% – the yearly rate. But if it stays for a year, it’s a different story. The effective interest rate will be 12.68% from the monthly compounding.

In terms of lending, some banks will quote you the APR. It may look like a small figure but if you really analyse, you’ll end up paying more because it does not take into consideration the compounding within the period you owe them the money (they call it term for loans). On the other hand, they usually pay depositors back less than half of what they earned after lending the money you lent them to other people. Check your local bank’s lending against their savings interest rate. Sounds clever? Well, that’s how the bank earns money.

Simple VS Compounded Interests

Simple interest pays a fixed amount over time. A way to explain this is:
You deposited money at a bank with a 5% simple interest rate on savings.

Principal amount = £1000
Simple interest = Principal x 5%
Year 1 = £1000 + £50 (interest)
Year 2 = £1000 + £50 (interest)

After 2 years, your £1000 becomes £1100. Nice? The compounded interest is nicer.

Compounded interest in layman’s term is “interest earning interest” and the more the compounds per year, the more money you earn. Sounds good to hear, but how does it work? You will need to have a savings calculator to start with.

Same scenario as above:
Compounded annually = $1000 + $102.50 (interest after 2 years) (APY = 5.0%)
Compounded semi-annually = $1000 + $103.81 (interest after 2 years) (APY = 5.06%)
Compounded quarterly = $1000 + $104.49 (interest after 2 years) (APY = 5.09%)
Compounded monthly = $1000 + $104.94 (interest after 2 years) (APY = 5.12%)

This will work best for people too busy (read: LAZY) to invest or sell merchandise. In doing so, your money will help you earn by making the money you earn, earn money. Choose a bank that can help you out with this by talking to them (or again, if you are too busy to drop by the branch, you can always talk to them on the phone through the phone bankers or use the internet as banks advertise their rates on their respective websites)

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