## What is interest?

The financial institutions want you to invest more so they have more money available to loan. Financial institutions are required to keep a percentage of their assets in the Federal Reserve Bank. They want large stable accounts so they know how much money they can lend. By lending money, they can make more money by collecting interest on the loans. That is how banks stay in business and this is their wealth management strategies.

How often do you look for investing advice or wealth management strategies only to find phrases like; “Minimum investment required” or “on balances of $500 or more”? Every financial institution has rules that they establish to define when it is worthwhile for them to pay interest. Think about it. Institutions track every cent in every account to calculate the interest they pay. It becomes a monumental task. Yes, they have software to track the balances and they have computers to add the interest paid. How do they pay interest on one hundred dollars at .25% interest rate per year? First, understand what percent really means. One percent means that it is equal to one cent per dollar. Therefore, .25% interest rate is an integer of .0025 or ¼ of one cent for every dollar per year. Another way to look at it is as twenty-five cents for every one hundred dollars per year.

## Here is the math formula: I=p r t

In wealth management strategies this means: interest paid equals principle multiplied by the rate of interest multiplied by time (1 year divided by 12 months is .08333). In our scenario that is $.02083 = $100.00 x .0025 x 08333 for one month’s interest on $100.00 at .25%. That also calculates to 25 cents per year if $100.00 is deposited.

That means for every account with $100.00 the institution has to track 2.0833 cents of interest every month, which they pay the investor. The institutions are encouraging investors to keep larger balances. That doesn’t mean it is not worthwhile to invest. Most banks offer free checking and usually have a savings account that has a very low starting balance like $10, $20, or $50 dollars. Remember that the lack of spending is also the act of saving.

## Start saving with less than the minimum balance

So you have just started out in the mean world and you have landed that job which barely pays your rent. The key to savings is the word barely. Let’s disregard all other expenses for simplicity sake. If you take home $200.00 per week and your rent is $750.00 per month because you need to have a place with a dishwasher and a pool in the middle of town. The difference is the “barely” which you save by not spending it. You take home $800.00 every month and do not spend $50.00. You just started a saving! Now that savings may be in the ‘cookie jar savings and loan’ based in the kitchen, or at ‘sock drawer credit union’, but it is savings. There is no security, no interest, and no tracking, but it is savings. If you do this faithfully every pay period, you will be putting $12.50 in the savings sock drawer per week. Provided no emergency arises you should not need to take money out and the fund grows at the rate of $12.50 per week. That will net you a cool $650.00 per year ($12.50 per weeks 52 weeks per year). Now you can definitely open an account at the bank or credit union. If you wait two or three years, you can start a ROTH IRA or other retirement account (it’s hard to invest in securities with small amounts of money and can be very risky for the uninitiated).

So, with respect to wealth management strategies you now have the habit of savings figured out. You cash your $200.00 paycheck, put $187.50 in the shoebox marked “RENT DO NOT TOUCH!”, and the other $12.50 goes in the sock drawer. We already established that you eat at your parents’ house so that we don’t deal with other expenses. Now, wouldn’t it be great to get rewarded for forgoing latte’s and movies? All you need to do is leave the $12.50 at the bank. The scenario looks like this: Week 1 put $12.50 in the sock drawer. Week 2 put $12.50 in the sock drawer. Week 3 put $12.50 in the sock drawer. Week 4 remove $36.50 from the sock drawer; open a savings account at the bank or credit union in the amount of $50.00.

Now, following wealth management strategies, you are putting your money to work for you. If your institution of choice pays .25% you will make $50.00 x .0025 x .08333 = .0104 per month. That is 1 cent for doing nothing that you weren’t already doing. The difference is that in the sock drawer at the end of twelve months you have 100% of the money you put in ($12.50 x 52 = $650.00). In the bank or credit union you get 100.25%. This way you collect interest on the interest that is paid every month. This is compounding and too complex to include here, but suffice to say that 52 weekly deposits with interest grow much faster than, a single annual deposit, or 12 monthly deposits, and definitely faster than the sock drawer. You still save $650.00 however, the monthly interest will compound at .25% monthly so you will have $.81 in interest after 52 weeks. Who does not like free money? Even a little free money is better than no free money.

## Maximize your return on investment

Now that you have savings, you want to maximize your interest rate under the formula of wealth management strategies, so shop around both online and at your local banks and credit unions. The higher the interest the more you make. Financial institutions are not all equal, and neither are their rates. They also do not stay the same month to month. It is okay to have several accounts (provided they are free) and move money between them. Here are several links o pages where they track and report rates. Don’t forget your local banks and credit unions! One local bank is paying an outrageous rate, but they require depositors to use auto deposit or auto bill-pay, make a minimum number of transactions, and receive electronic statements. The rate is higher than most certificates of deposit, so if you will meet the criteria, why would you not use that bank? One reason would be if you need access to your funds in far off locations and the bank does not have branches or affiliates there. For the most part, however, your savings is just sitting there growing, and that is the point, right?