Compound Interest: Friend or Foe?

February 25, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When investing, compounding interest can be your friend; however, it can also be your enemy especially when taking into consideration of one’s debt. Students and many adults needs to learn the basics of compound interest because it impacts their ability to get out of debt, save money, and live smart financially.  Over 75% of the country currently live paycheck-to-paycheck.  Conspiracy theories suggest banking institutions don’t want the general public to understand how basic finance or money rules work because this eats away at their financial profits.  Maybe, maybe not.  I would lean on the side that public education systems just don’t see it as an important component of their curriculum, but an anonymous banker from Goldman Sachs wrote an article in Business Insider, that math teachers do not grasp the basic fundamentals of compound interest. 

 

With today’s students and some math teachers not understanding the impacts of their inability to know basic fundamentals to finance, modern marketing has taken advantage of consumers through crafty ploys to lure in shoppers, take advantage of credit cards highlighting interest free for 12 months, etc.  Most Americans don’t know that the interest on credit cards compound daily—not monthly, DAILY!  Yikes!  See the example below of the dangers.

 

Example:

$200 credit card charge on February 1. Assume 13% (fairly low for a standard credit card).

Most would calculate in their head $200/$10 payments minimum = 20 months (if 0% interest)

 

Expected Payoff Time with the compound interest: 23 months if you paid only $10 a month.

 

 

It took you 3 months longer plus $27 interest.

 

Although this is a small scale example, think of the endless hope of those with over $15,000 in credit card which is the national average basically. 

Debt is not friend and neither is compounding interest when it is applied to your debt.  Remember that before you make those credit card purchases, that you will be taking money from your future paychecks to pay this off.

 

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