It is no secret that utilizing interest is a great way to help your money grow. This is especially important when so many people are trying to work within a budget. To further complicate matters, many people are simply intimidated when it comes to financial jargon. For those brave enough to tackle the financial jargon they find that locating a bank or credit union that will offer premium interest rates is a task unto itself.

So what is one to do? The first step to take is to become familiar with the types of interest that your money can earn. The first form of interest to be discussed is Simple interest. This is a form of interest most are familiar with. However, simple interest for the most part will yield a rather low return on the money invested. With simple interest, the interest earned is not applied to the original investment (principal). So, year in and year out the amount of interest earned stays the same.

To illustrate this let us say Mr. Jones decides to open a checking account with $100 that he received as a bonus from his job. Mr. Jones opens the checking account with the understanding that he will receive 5% interest annually. Every year that Mr. Jones leaves his money in that bank; he will earn a grand total of $5.00 per year. At the end of 25 years Mr. Jones’ will have a total of $225.00 in the checking account (the original $100 plus $125.00 his money earned at a 5% interest rate). At this rate, Mr. Jones cannot afford to even dream about an early retirement.

The second form of interest to be discussed is compound interest. Each year the interest your initial investment earns is added to the principal, allowing you to earn interest on your interest. Therefore compound interest will provide a much needed boost to any budget plan and should be taken into consideration when looking to invest for your future.

To illustrate the point, let us say that Mr. Smith also received a $100.00 bonus from his employer. Mr. Smith does some research and finds an institution who offers compound interest. Mr. Smith opens his account with $100.00 with an interest rate of 5%. In one year Mr. Smith will earn $5.00, however that $5.00 will be added to his original principal of $100.00. Therefore, at the end of 25 years Mr. Smith will have an account balance of $338.64 ($100.00 the initial amount used to open the account plus $238.64 in interest). By simply doing a bit more research Mr. Smith has earned a total of $113.64 more than Mr. Jones.

Obviously, the above examples are not by any mean realistic and are simply meant to be used as a way to illustrate the differences in each of the interest forms.

Now that you have acquainted yourself with the two main forms of interest we can go on to discuss ways in which you can use interest as a tool to help grow your financial future.

The first thing to keep in mind that especially in this day and age banks have become highly competitive, so do some shopping for the best interest rates to meet your financial goals.

If you simply have your sights set on earning compound interest then you must be aware that there may be some risk involved as it involves long term investing. Experts in the field are projecting a yearly return of about 6% or higher, as promising as this may sound, again, this is only a projection not a guarantee.

You may already be reaping the rewards of compound interest without even realizing it. If you should have a mutual fund account and continue to reinvest dividends and interest, you will find it to work much like compound interest.

A word of caution, as alluring, as compound interest may seem at first glance, one should be aware that it can also cost you money. A great example of this is the use of credit cards. By simply carrying a balance on your credit card compound interest is lining the pocket of our credit card company not you. To ensure you reap the benefits of compound interest you should whenever possible pay off any balances on your credit cards.

It is interesting to note that in some form compound interest has been with us for literally centuries. Benjamin Franklin actually implemented the concept in his will. Upon his death Mr. Franklin left a set amount of money to Boston and Philadelphia. This money was to be set up in a fund that would last 200 years. The money would be loaned out to select individuals with an interest rate of about 5%. One century later the cities were able to withdraw a fairly sizable amount from the fund leaving the balance of the fund to continue working for the next one hundred years. Although the cities may not have followed the instructions to the letter, the advantages of compound interest were apparent.