How Can My Money Grow?

by: Daniel P. Matthews

Well, planting dimes in the garden won't work! There are two reasons planting dimes won't work. Dimes don't grow is one reason. The other is that dimes are cash and cash doesn't grow. Money grows. Receiving a return is growing your money.

You can get a return on your money in lots of ways. But, remember from a previous essay that your money can be in lots of places. For instance, equity in your house grows as the market for real estate grows. Money in your savings account grows as the bank adds interest to your account. If your car is a classic it might be worth more than you paid - therefore your money has grown. You can grow your money, yes you can.

Interest that your bank pays on your savings is a form of return. Stock prices rise (they also fall!) and give you a return. Some stocks pay dividends - another form of returns. If you are lucky enough to own a Picasso or Renoir painting you might be able to sell it for a handsome profit - another form of return.

By now you have probably thought of several other methods of getting a return on your money. But, do you know the real driving force behind growing your money is compound interest? It is possibly the single most important subject in achieving financial independence.

Compounding occurs when you are paid interest on the interest you were previously paid. A simple example is $100 in a savings account is paid 5% annual interest. At the end of the first year there is $105 dollars in your account (Your $100 plus the banks $5 interest). At the end of the second year the bank adds another 5%, or $5.25. The difference between the first and second year interest payment is 25 cents. The 25 cents is the interest paid in the second year on the $5 interest paid during the first year. It follows then that in year three the bank would pay interest on the original $100 and the $10.25 interest paid during the first two years. The interest paid during the third year would amount to $5.51 bringing the total balance at the end of year three to $115.76.

Compounding is at the heart of your plan to achieve financial independence. Imagine if the interest rate was 8%, 10%, 15% or even higher! The results are even more dramatic. But, the road to financial independence begins with a plan. Figuring out what to plan and what is a reasonable plan is easier than you might think.