What is interest?
An interest is the cost of using or borrowing idle capital for profit making ventures. It is the amount charged for using an asset to generate income from commercial ventures. Interest could be in the form of rent/rentals which are periodic payments made on the use of borrowed capital, net charges on credit facilities like merchandise, interests paid by banks to depositors or dividends on shares owned.
There are two types of interest namely;
1. Simple interest which is the interest payable on principal alone and
2. Compound interest which is the interest payable on both principal and previous interest yielded by same principal.
How does interest relate with personal finance?
The fact that interest is the extra or net amount gained by borrowed capital means that it is an extra source of income to indivduals. Ideally, extra cash and saved money tends to become idle, it is therefore the duty of each and everyone of us to keep idle funds in interest yielding investments such as bank deposits, annuities, bonds, treasury bills, stocks or mutual funds. You could also make your idle money busy by buying merchandise for resale such as electronics, food items, building materials and other consumables or giving it out as loans to credit worthy individuals who are willing to pay interest on them. It may not make you rich immediately but compounding such investments over time can make you rich.
Most individuals who store their money in idle and expensive investments like holding cash, buying consumables for personal use or granting bad loans and gifts are wasting their money and widening the gap between them and their dream of being financially secure. Keeping your idle funds busy will yield interest to you and when such interests are compounded over time, poverty takes a back seat.
What are the benefits of Interest?
Interests have the following benefits:
1. They are more secure and stable returns on investments than profits
2. They are relatively cheaper to maintain in that they attract lesser tax than business profit
3. They are capable of yielding even more interests thus compounding principal over time
Building Wealth using interests (A simple scheme)
Wealth is measured in terms of assets and assets are investments. Investments are monetary outlays that have compounded over time and monetary outlays were once idle money put to work. Therefore to build wealth, you need to put all idle funds to work to yield interest which can be compounded over time (investment) to become assets which bring wealth.
In investment, the start time and the end time combined gives birth to maturation (Tenor). Maturation is therefore the duration or lifetime of any investment. It is a very important factor that must not be overlooked when making an investment decision. Any person seeking to make progress in the art of investment must consider how such investment will affect him/her before deciding on the maturation. For instance if I wish to invest for my retirement and my retirement is due in 25 years time, then th maturation for such an investment must be at least 25 years.
Once maturation is determined, the right investment is not very difficult to find.
Maturation and investment compatibility
Investment Motive Maturation Compatible Investment
Retirement Long Term Stocks, Real Estate
Home ownership Medium Term Stocks, mutual funds, Annuities
Pilgrimage Short Term Annuities, bank deposits, resellership, trading
Long term means investment of 10 years or more,
Medium term means 5 to 10 years
Shor term means less than 5 years
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