Over the last few years I’ve had numerous conversations with family and friends about money.  I have since realized a secondary benefit to my finance education, a better understanding of how our monetary system works and who is making

Which side of this deal are you on?

money off of my money.  A number of us don’t really understand how our banking and monetary system works.  Some of us may believe that all the money we deposit is literally in the bank’s safe!

Here is the basic principle of how money works in our society.  You are in one or more of these three categories: you have just enough (you are neither lending nor borrowing), you have more than enough (you are lending money), or you do not have enough (you are borrowing).  If you lend money you earn more money, if you borrow money you pay more than the amount you borrowed.  If you neither lend nor borrow money, in the long term your money still loses value because of inflation.

Even though most of us understand this basic principle, why do we keep so much money in non-interest earning accounts?  Why would we allow a bank to charge us an account fee to keep our money?  Banks only have to keep around 10% of their total deposits on hand, the rest of the money they loan out to earn interest.  They are lending out your money to earn interest, so why aren’t you?

The phrase of “make your money work for you” has been overused, but it is still relevant because we still don’t get it.  When completing my taxes this year I saw that I earned a few hundred dollars in interest from one account.  Even though the interest rate was measly this year, the account took about 30 minutes to setup, meaning my time earned me around $500 per hour!  Ask yourself a few questions to understand how your money is working for or against you.

• What money of mine is earning interest for someone else instead of me?
• Where am I borrowing money when I could instead save until I had enough for the purchase?

If I take a loan at 10% interest for a $1,000 TV I am effectively paying $1,100 for that same TV.  Would I still have bought that same TV if it cost $100