Skip to main content

Futureproofing: Compound Interest Is Your Frenemy



First, an apology for using the term "frenemy." I hate this word but find it useful for this post.

What is compound interest? From our friends at Wikipedia: Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. How does it work? With stunning efficiency. For instance, if you have an interest-bearing savings account, compound interest is your friend, as your banking institution will pay interest (albeit a minisule amount these days) on the principal dollar amount. Over a long period of time, compound interest is earned on both the principal and accumulated interest, eg $100 principal + 5% interest = $105.00. Left untouched, your next round of 5% interest will be paid on the $105.00 balance, resulting in a sum total of $110.25. This is a simple (and unrealistic, in terms of interest paid) example of money making money.

If, however, you have debt on an interest-bearing loan, compound interest if your enemy. The kind of enemy that doesn't just want to conquer you, but humiliate before devouring your flesh and enslave your family kind of enemy. Suppose you have a credit card with a $1000 balance (see what I did there, with the debt being 10x the savings used in the previous example?) and an interest rate of 15%. After applying interest, your balance will be $1150.00; left unpaid, this will balloon to $1322.50 and so on. This doesn't begin to take into account late fees, etc. And your minimum payment? 2-3% of the balance, in many cases, but in ALL cases, much less lower than the interest rate. Lenders are betting you will run up a balance, then pay it off over time, which allows compound interest to do its dirty work. Avoid when possible.

I'll close with a quote from Albert Einstein: “Those who understand interest earn it, those who don’t, pay it.”

Comments

Popular posts from this blog

In Memorium: Shaun Mullen, A Most Generous Man

Author, editor, blogger, and so much more Shaun Mullen has passed. Noting his blog  Kiko's House  hadn't been updated in a while, I did a search and discovered his  obituary . My friendship with Shaun goes back to 2006. While living in Australia, I'd discovered his blog when searching for informed commentary on US foreign policy in the Middle East. Sadly, much of that policy remains unchanged 14 years later, but that is for another post. Shaun  had noticed that his blog wasn't rendering correctly in Internet Explorer and asked if anyone could suggest a fix. I, being a bit of a tech head at the time, suggested Firefox or similar browser, and the problem was solved. We kept in and out of touch, finding common ground in music (I mentioned my love for the Grateful Dead and Shaun sent a dozen CDs of concert recordings. By International mail. The man was generous to a fault.), worldview, and more. My old site got its greatest number of hits when Shaun linked to a few of m

Quote Of The Day, Kafka Edition

I usually solve problems by letting them devour me.  - Franz Kafka

The World In Which We Live: Premature Reopening Edition

I don't even know where to begin. Despite there being no effective treatment, vaccination, or the much-discussed herd immunity, many states are relaxing social restrictions put in place to mitigate the spread of Covid-19. My home state of Georgia was among the first to do so (my sense of timing and location is impeccable). Instead of a state economy charging out of the gates like a racehorse, we get this: An 83% increase of confirmed cases in my county, which is mostly rural with a small industrial base, 90 miles from Atlanta. But freedom, amiright? I find it utterly amazing that people find being instructed to stay in their homes and take extra precautions to prevent becoming infected with a fatal disease a form of tyranny. When did "Wear a mask and wash your hands regularly" become equal to tanks in the streets? I understand wanting a haircut; Hell, I need  one but don't want to kill my barber, a nice guy who fits nicely into the at-risk category. Do