As a Financial Freedom seeker, one of the most important questions you can ask yourself is, “How can I make money with money?” The sweet and simple answer should always be ‘yes’. Perhaps you are already there; perhaps you are wondering what I mean? In either case, read on – we’ll continue on the path towards Financial Freedom!
I once had a friend who was very well off. Not only did he make a good amount of money but he also was frugal and a great saver. He told me he had six figures in his bank account. Being the good friend I am, I offered up some free financial wisdom.
I asked him, “what is the percentage yield on the savings account?” He looked at me with with a sideways, confused glance. It was then that I knew he was making a critical error; his money was not making any money!
Instead it was sitting at a bank, in what I assume to be a non-interest bearing checking account. This money was fully loaned to the bank to invest and make their ‘X’ amount of returns while his stockpile of funds sat and lost value due to inflation and principle of the time value of money.
I immediately told him to open up an FDIC money market account* and to put nearly all of that money in the account so that his money would go to work for him. He did as I directed and the rest is history.
Why We Need To Make Money (Out Of Money)
Are you like my friend, who had money that wasn’t making any money for him? If you are, there is hope yet. Here are three reasons why we need to have our money making money for us:
Interest income is a form of passive income for the astute investor. Ideally our funds would be invested in the stock market where the potential returns are greater, but if we do plan on holding cash, it should at least be making money for us. What is better than making money even while we sleep? Answer: Nothing!
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It is often said that compounding interest is one of the greatest forces in the known universe. Even if interest rates are only currently 1-2%, that is money being made on money. This is what we’ll refer to as the ‘snowball’ effect: the more and more you let your money work, the bigger and bigger the fund gets and the more you make. Compounding interest is a beautiful thing.
Sometimes people hesitate to invest in the stock market because they are risk averse; they don’t like to lose any money. I can fully appreciate that and in fact, I would argue that unless you are willing to become an active investor of your own funds, you should not be investing in the market on your own time. However, no matter what your current level of financial acumen, having your money earn interest in an FDIC insured MMA/Savings account is a no brainer. One of the biggest overall gains will be psychological – you will see yourself on the forward journey towards Financial Freedom!
How You Can Make Money (Out Of Money)
So how do we begin this journey? Remember, we always move forward with small steps built on one another. Here are the steps I would suggest on your path towards having your money make money:
1. Set up a checking account
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I assume that you have this already set up, but I add it as a step as it is critical. Many MMA/savings accounts limit the amount of withdrawals that you can make (mine is currently set at 6 withdrawals/mo.), so you will want to have a checking account set up as your main account with which to pay bills.
2. Move excess cash into your savings account
Think of you moving your cash around like lanes on a highway. You can ‘drive’ your money to the savings account or back to the checking account, it’s all up to you. Essentially the goal is to take any cash that is not meant for day-to-day expenses and deposit those funds into your MMA account where those funds will earn interest. See Building a Savings and Investing Web for more in depth knowledge on creating your multiple account ‘web’.
At the hear of this step, you are essentially building your “Emergency Fund” from which your goal will be to always add and never take away. With that being said, this account exists for you to store excess funds, so if you need those funds for day-to-day necessary ‘fixed’ expenses, then it makes sense to make the withdrawal of funds.
A quick word of caution: be careful not to see this balance as your ‘play’ account. Remember, this is an Emergency Fund, used only if necessary. The goal is growth of this account!
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One of the most important aspects of this step will be to manage your cash flows between your accounts. The last thing you want to have happen with this arrangement is to start getting hit with overdraft fees on your checking account or late fees on bill payments as these negate the purpose of passive income in the first place. At minimum, pick one day a week to manage your financial situation and make sure you have a Budget Day to manage your cash flows.
3. Watch the interest grow
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This is the beautiful part. It will be small gains at first, but as you keep adding to your account and as the interest keeps growing on the interest, it will be a beautiful thing to watch. Stay the disciplined course and you will see the benefits!
Now, there are more ways to put your almighty dollar to work than in a Money Market/Savings Account (stock market, bonds, crypto, businesses, etc.). What we are discussing here is the very basic principle of making sure that at minimum, your hard cash is making some sort of return for you.
If you want to take it to the next level, consider buying stocks or mutual funds. However, these vehicles can lose value from time-to-time but ergo the gains can be higher too. I personally love dividend stocks when adequately valued.
Start with building your savings account, making sure your money is always making money, and continue grow from there!
Upwards and Onwards to Financial Freedom!
Disclaimer: (1) All the information above is not a recommendation for or against any investment vehicle or money management strategy. It should not be construed as advice and each individual that invests needs to take up any decision with the utmost care and diligence. Please seek the advice of a competent business professional before making any financial decision.
(2) This website may contain affiliate links. My goal is to continue to provide you free content and to do so, I may market affiliates from time-to-time. I would appreciate you supporting the sponsors of MoneyByRamey.com as they keep me in business!