What is money? Stones; salt; numbers on a computer screen: all and more have been used over the ages. Money itself is nothing but a convention: a promise to pay a value on which members of a society are all agreed.
And yet, arbitrary though it may be, money gives the bearer the power to get and do things—one of which is to make money on money.
Taking poetic license, you can think of interest like rental of someone’s money. They give something up (other uses of their money) and you compensate them for that (in interest). Or better, someone else pays you interest to use your money. There’s typically a self-fulfilling momentum.
Whatever direction your money stack is moving in–up or down–the speed accelerates because of how interest builds on interest—what’s called compound interest.
A St. Louis Federal Reserve Video Explaining Compounding Interest
It’s almost impossible in our society to avoid incurring interest charges. Activities that predispose you to being wealthier than average, such as graduating college and buying a home, require most people to take out loans.
But if you don’t understand how money works and get into more debt than you need to, you are now sowing years of future grief.
On the other hand, in your twenties, you have an advantage most lack. You have time on your side. Even the smallest sums invested today grow larger than you would imagine.
And, yet the mechanics of money don’t get at its mystique. They are the tip of the iceberg that is the psychology of money.
Strange But True:
- Could you live without money? Hear about one Colorado man who chose to do so.
- Some people are rethinking money, especially since the financial crisis of 2008, exploring alternative currencies and even returning to barter. See video.
Read on… Experts’ lists of the best books on money: