A Lesson On Compound Interest


Compound Interest Is The Most Powerful Force In The Universe.

There is a good chance that you have heard this quote before. Any guesses on who it was that originally said it?

If you guessed Albert Einstein then you are correct and you should absolutely reward yourself with something nice… maybe a cookie or some fudge.

So what exactly is compound interest? I’ll quote the definition from wikipedia* for you.

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded).

cashIt’s simple really. You take a loan out from a bank and every month (or whatever the terms declare) they “charge you interest” or compound the interest back into your loan. Then the bank will start to earn interest off of the interest that they just “charged you.” Make sense? Obviously if you’re paying the interest off every month it won’t have much of an effect on you, but the act of compounding still does make a difference.

Here’s where you really want to pay attention when it comes to the power of compounding interest. Let’s say that you buy a brand new, top of the line, television set from Best Buy and spend a total of $2,500 with taxes. Now let’s assume that you charged this television set on your credit card, which has an 18% interest rate. If you paid only the minimum payments (usually 3% of the outstanding balance) then it would take you 180 months (fifteen years) and about $4,798 dollars to pay off said television set.

The lesson here? Other than pay more than the minimum on your credit card, you should remember that compound interest can either hurt you or it can help you. You might as well make compound interest work for you, by saving and investing your money.

*I’ll not make a habit of using wikipedia as a direct source, but in this case I couldn’t have defined it better had I done it myself.

One response to “A Lesson On Compound Interest”

  1. Hey would you mind sharing which blog platform you’re using? I’m going to start my own blog in the near future but I’m having a hard time making a decision between BlogEngine/Wordpress/B2evolution and Drupal. The reason I ask is because your design seems different then most blogs and I’m looking for something unique. P.S Sorry for getting off-topic but I had to ask!

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