Make Your Money Work for You

Your money is an asset, and it should work hard for you in the same way you work hard to earn it. While this may sound very general, there are three components of putting your money to work that you should pay particular attention to:

• Put as much money as you can to work as fast as possible.
• Earn as high a rate as you can on your funds.
• Avoid costs associated with your funds, such as fees and interest costs.

Your Money Works for You

One of the benefits of “owning money” is that others will pay you for the use of your money. That benefit is called interest. When you deposit money at your financial institution, the institution uses your money to make loans or investments. They pay you interest for using your money. They make money by earning more on it than what they pay you.

The Wonder of Compound Interest

Compound interest is often called one of the wonders of the financial world. Simply put, compound interest means earning interest on your previously earned interest. The terms "compounded daily," "compounded quarterly," or "compounded annually" refer to how often the interest is added to the balance and starts earning more interest.

The Rule of 72 is a simple way to estimate fairly accurately the effect of different interest rates over various periods. Remember that money doubles when the interest rate multiplied by the number of years equals 72.

• Money doubles in 6 years at 12%.
• Money doubles in 10.2 years at 7%.
• Money doubles in 12 years at 6%.
• Money doubles in 8 years at 9%.
• Money doubles in 9 years at 8%.

While the Rule of 72 doesn’t give you exact results, it provides a quick way to get a solid estimate.

Putting your money to work

Two simple ideas:

• Use direct deposit to get your paycheck deposited quickly, safely, and conveniently.
• Do not have excess money lying around. It will be safer and earn you more money if it is in an account at your financial institution.

Earning the best interest rates you can

Different types of accounts earn different interest rates. Institutions typically base their interest rates on the amount of money in the account and the level of transactions.

• Checking accounts typically offer the lowest interest rates and allow for the most transactions.
• Savings accounts typically offer slightly higher interest rates but have fewer transaction options. Usually, you cannot write checks against savings accounts, or if you can, the number may be limited.
• Certificates of deposit are slightly different. You choose a length of time you are willing to leave your funds deposited, and depending on that length, you earn different interest rates. You can cash in your CD early, but you will probably face a fee.

Here are some sample interest rates on different types of accounts:

Account type	Interest rate
Checking account	0.07%
Savings account	0.39-0.60%
6-month CD	1.78%
12-month CD	1.90%
36-month CD	1.64%
60-month CD	1.69%

You should try to estimate your liquidity needs, including how much money you’ll need and when, and then transfer excess funds to higher-yielding accounts. Move money you won’t need for monthly expenses to your savings account. As your savings increase and you realize you don’t need immediate access to all of it, you can transfer some funds into higher-paying CDs with maturities that align with your expected spending needs.

Avoiding needless fees and interest costs

After working hard to earn your money and having your money work hard for you, make sure to manage your finances in a way that minimizes or avoids fees. For example, paying five $3 fees for ATM usage ($15) would completely cancel out earning 0.50% interest on a $3,000 balance in a savings account for a full year.

Fees and charges to avoid:

• ATM fees – Be sure to use ATM machines associated with your financial institution to avoid fees.
• Minimum checking account balance fees – Be careful not to let your balance fall below the minimum if your account requires it. You might consider transferring funds from your savings account to avoid the fee.
• Excess transaction fees on your checking account – If there’s a limit on the number of checks you can write each month, do not go over it.
• Utility bill payments – Some utilities (electricity, gas, and phone) allow you to pay a bit less if your payment is received by the due date.
• Interest on unpaid credit card balances – Interest rates on credit card balances can be very high (up to 18% in some cases). Pay your entire balance each month or pay down your balances as quickly as you can, even if it means using some of your savings.
• Late payment charge on credit cards – A $20 late payment fee when paying a credit card bill equates to all the interest you would earn on a $4,000 balance in a savings account paying 0.5% interest.