Interested In Interest Income? Here’s Why You Should Be!
Is your money working for you, or are you working for your money? While the latter is all too common, there are many ways in which you can achieve financial freedom and gain the ever-lusted after luxury of more time by engaging in inactive income streams where the money earned requires little work, or no active involvement to generate ongoing capital. In this article, Bloom Investment Counsel takes you through interest income.
What Is Interest Income?
- Interest income is simply the amount earned for lending money or letting another entity use your funds.
- When you earn interest income, you are being paid for the chance to use your cash. This is especially beneficial if you are not utilizing the capital otherwise—you’re preventing the loss of your capital by engaging in the chance to be compensated.
How Do You Calculate Interest Income And What Is An Example of Interest Income?
Calculating interest income can vary depending on the method used as well as the type of interest you will be receiving. Here is an simple example:
- Take the annual interest rate and convert it from a percentage to a decimal by dividing the number by 100—for example, a 3% annual interest rate can be expressed as 0.03.
- Taking the decimal you’ve just calculated, multiply it by the number of years that your capital is being lent out for. For example, if you have 3% annual interest and you are lending your money for 3 years, you obtain a figure of 0.09.
- Now, take the figure you calculated in the previous step and multiply it by the amount you have lent out to compute the total interest paid: perhaps you lent out $10,000—multiplying it by 0.09, we obtain $900 as our answer. So, $900 is the interest earned for the money lent out for a time period of 3 years.
Of course, on an interest bearing bank account, if you don’t withdraw the interest, the next interest payment is based on the original amount plus the previous interest earned—this is called compounding.
What Are The Pros Of Interest Income?
- Interest income is inactive in nature, so aside from placing your money in the appropriate interest-bearing account, there is little work required on your part.
- Interest on an account can be compounded, i.e. interest income is based on the initial amount deposited plus the interest earned as long as the interest is not withdrawn.
What Are The Cons Of Interest Income?
- Interest income in Canada is not taxed at the same favourable rates as some other forms of income.
- Interest rates may be lower than the yield from other income streams
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.