Before I get started on Part 2 of this financial segment, I would like to thank everyone for their support and for showing DuePayer some love. I’m glad that Part 1 was informative and able to help those who had no previous knowledge of valuable financial information.

During the last segment, I left off this part on purpose because I believe this topic deserves its own post. We hear about interest all of the time, especially those who have loans such as mortgages, credit cars, car notes, and student loans (you know… the same ones Sallie Mae and Perkins inflate every year). That’s how corporate America and capitalists make millions and even billions off of the 9-to-5ers who aren’t privy to how it works. And even if you are knowledgeable, it’s almost impossible to avoid. Well, the purpose of this column is to provide insight on how interest can work for you.

Part 2: Interest

Interest is money that your bank, savings and loan, or credit union pays you to keep your money. They pay you interest because they use your money to earn interest for themselves on investments or on loans they give to other people.

The amount of interest you earn is expressed as an annual percentage rate, such as 3 percent. This means the bank will pay you that percentage (3 percent) on the money you keep in your account for one year. For example, if the interest rate is 3 percent and youo keep $100 in your savings account for one year, you would have about $103 at the end of that year. If you left the $103 in your account the next year, you would earn interest on the interest you were paid the previous year as well.

Three percent may not sound like much; but the more money you keep in your account, the more money an institution will pay you. You can see that interest payments can help your savings account increase quickly. When you earn interest on the interest you previously earned and the amount you originally contributed, it’s called compound interest. Over time, compound interest accelerates your money’s growth. Consider this:

Lisa starts investing for her retirement at age 21. She invests $1,000 each year for 10 years until she is 31 years old. She stops putting money into her retirement account when she turns 31 but leaves her money in the account so it will grow “compound” until she retires at age 65.

Mike, by contrast, doesn’t start saving for his retirement until age 30. He places $1,000 into an account every year for 35 years until he reaches age 65. Like Lisa, Mike’s account earns 9 percent annual interest. Lisa saves for 10 years and Mike saves for 35 years – who has more money at age 65, Lisa or Mike?

If you guessed that Mike has more money, you are mistaken. Lisa has about $91,034 more in her account even though she only deposited money for 10 years. The mathematical reality of it is, for every 10 years you delay in saving money, you will need to set aside more than three times the amount of money later to catch up.

Compound interest really works hard for you. Just look at the chart to see the difference between Lisa and Mike when they retire at age 65.

People sometimes refer to their passive income as their PIG (passive income generator). As you begin to generate wealth, think of it as feeding your PIG. You can become fat and happy, or more appropriately, wealthy and mentally liberated.

Before I bring this segment to a close, consider the following:

Ø What is the first thing you think of when you hear the word income?

Ø List the steady sources of income for your household. This is income that family members receive on a regular schedule each month.

Ø Besides holding a steady, regular paying job, what other ways can you think of to generate income?

Ø What is the difference between buying fresh kicks for $100 and buying a U.S. savings bond for $100?

I hope the information provided about assets, passive income and interest have been helpful to you or at least enlightened you. I think more of us need to use the banks to our advantage. I know that everyone has bills and other financial obligations but always try to put a little away, even something small as $25 per check. You would be surprised as to how much your account will grow over time. No matter how you choose to earn and save money, never forget the common goal that we all strive for: financial freedom.

No matter what you do in life, you gotta pay ya dues… just remember to pay da bills first!

D. Bill$