We often talk about interest rates associated with borrowing money, and indeed, a nominal interest rate is the cost to borrow money. But what about the good kind of interest rates? The kind you can earn on money you already have and don’t need to spend right away? Because the possibility for earning interest always exists, economists see this kind of interest as the opportunity cost of holding money. Besides, we already learned that money loses value over time due to inflation. So if you hold cash too long without investing it and earning interest, your cash just depreciates as price levels rise. Better to invest!
Interest can be earned on a variety of savings products. Any time you invest your money, you are becoming the lender, and the institution collecting your money becomes the borrower. Therefore, any institution offering financial assets for sale is actually asking you, the consumer, to lend them money. Weird, right? If you decide to invest with that institution, your investment is now a financial asset to you, but a financial liability to the institution. Conversely, if you borrow money from an institution, you have taken on a financial liability (you are now on the hook for that money, plus interest!) and the lending institution has a new financial asset.
Savings Accounts: an account or financial product which stores money for later use and pays interest to the owner at regular intervals. May or may not be time-restricted (time-restricted products cannot be withdrawn until the end of the maturity period without incurring a fine or penalty). Examples: Certificate of Deposit (CD), high-interest savings account, money market account/fund (MMF).
Stocks: a share (portion) of a company bought at a market-determined rate which may go up or down in value. Some stocks pay dividends during profitable periods to reward the loyalty of shareholders and attract new shareholders. Stocks are bought and sold on exchanges (like the New York Stock Exchange). Related products include mutual funds, exchange-traded funds (ETFs) and futures contracts/derivatives.
Non-Liquid Assets: this category includes a broad assortment of assets which may go up or down in value over time; two things they have in common are that their value is subjective and that they have underlying use value (a function or purpose). Examples include real estate, fine art/antiques, jewelry, and natural resources like livestock or coal. They are non-liquid because you have to go through many time-consuming steps to convert them to cash usable for purchases.
Bonds: a bond is a type of short- or long-term savings asset in which the bond issuer (a government, bank, or corporation) borrows money from the bond buyer at a fixed interest rate. Interest payments are made to the bond owner at regular intervals. Once the agreed-upon time period has elapsed (the bond has matured), the bond issuer pays back the face value of the bond. For example, if you buy a $1,000 bond with a one-year maturity period, you earn interest for one year, and then at the end of the year, the bond issuer repays your initial $1,000 investment. The interest you earned is your rate of return, or profit, from the investment.