COMPOUND INTEREST: YOUR BEST FRIEND & WORST ENEMY
Posted on: Apr. 28, 2017 in Uncategorized

Interest is one of those financial terms that gets thrown around often. You likely hear about interest rates and interest hikes and your money growing interest and a bank or credit card charging you interest. But do you really understand it?

In short, interest is what makes your money grow while it’s in the bank. It’s the same thing that makes your credit card balance go up when you don’t pay it all off at once. Let’s dig deeper to get a better understanding of what compound interest really is and how it works.

Here’s the bad news first: When you borrow money, the bank will charge interest. This holds true whether we’re talking about a mortgage, a can loan, or a credit card. Whenever you’re considering taking out a loan or swiping your credit card, it’s important to remember that the amount you borrow isn’t the true amount you’re spending. Consider the interest rate as well. For some loans, the outstanding balance, aka the principle of the loan, will be multiplied by the interest rate daily! This can add up pretty quickly. While some loans, like a mortgage can’t usually be paid off in a month, anything you can do to reduce the principle will help. For smaller credit card charges, try to pay them off right away to avoid interest adding up.

Here’s the good news: The same way interest accumulates on the balance of an outstanding loan, it can accumulate on the balance in your bank account. There are many types of bank accounts, as well as Certificates of Deposit and other savings vehicles where your money can grow interest. How much interest will accrue depends on the type of account. It’s important to talk to your banking institution so you have a good understanding of what to expect over time.

Remember how we said it’s important to pay off as much of your debts as possible, as quickly as possible because compound interest can really do a number on you? Well, this is the same reason we recommend saving as much as possible and letting the money sit in an interest-bearing account for as long as you can. Compound interest can be your best friend, too!

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