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What does it mean to let your money work for you? Photo: Ole Bendik Kvisberg/TSD Illustration

Let your money work for you. All of us have heard that saying at some point, but what does it really mean?

For some of us, the idea of compound interest makes natural sense. If you put away money for a long time, it’s going to grow slowly at first, but over time it will grow faster and faster and faster. It is exactly that method that allows people who save a lot of money when they’re younger to become incredibly wealthy when they’re older.

Yet this picture is still one that many people have a hard time thinking about. Today, I’m going to walk you step by step through seven years of compound interest, just so that the idea is as clear as possible.

Even professional Wall Street traders struggle to beat the market. Photo: Brian Glanz

There are an almost infinite number of ways to approach investing, but my personal favorite is called index investing. It’s a simple strategy that can yield remarkable results. I use it myself and it’s the strategy I recommend to clients who come to me for investment advice.

My goal in this post is to explain what index investing is and why it’s effective so that you can decide whether you would like to use it for your own investments.

What Is Index Investing?

At the highest level, there are two different approaches to investing: active and passive.

Radiolab hosts Jad Abumrad (right) and Robert Krulwich explore scientific curiosities with a sense of humor. Photo: WNYC

I spend the equivalent of a full-time job working at my computer or laptop, and that’s usually with audio turned on. On top of that, I have my cell phone almost everywhere with me and when I’m in the car; I usually plug it in and listen to the audio through my car’s speaker system.

What do I listen to? Podcasts.

Podcasts are free audio programs distributed over the Internet. You can download them and listen to them as you please, essentially creating a radio station focused entirely on the topics you want to listen to. There are podcasts out there covering almost any topic that you can imagine – and probably dozens of podcasts on that topic.

Contrary to what some people think, those airline miles or hotel stays really are free — as long as you use a rewards card responsibly. But that’s not the whole story, either: There may be taxes and fees to pay, and redeeming your rewards can get tricky.

Almost everyone wishes they could get something for free, but few people know that the pursuit of “free stuff” is commonplace among those who take advantage of credit card rewards.

The problem is, it can be difficult to differentiate between fantasy and reality, since almost everything you hear on the topic comes from those who benefit if you sign up – banks and travel bloggers.