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

Finding Adventure In A Google-Mapped World

Technology has made our world a smaller place, a place less mysterious and perilous. Where once one had to travel to see a destination, now we simply look it up and look at pictures. This is both an advantage and a loss, and I'll try to explain in the paragraphs that follow.  Gone are the days of grand adventure, of heading off into the unknown. While it is true one can set off on a small, personal adventure, you're never too far away from information that can remove obstacles and inconveniences from your path, but remember those things are part of the path , and to remove them removes at least some of the adventure.  So, what to do? I suggest doing what technology regularly does: miniaturize.  Get to know your local area. You may think you already know it, but a few minutes of online research will have you raising your eyebrows. For example, I recently learned an old bridge just a short distance from home holds the distinction of being the oldest bridge still in use in the cou

A Black Swan Of My Very Own!

 One week ago, I, along with all employees of the print division of Brown Industries, was summoned to a meeting. Tensions were high and fear was palpable, as work had been slow for several weeks. Layoffs, it seemed, were to be announced.  If only it were so simple. Speaking through a poorly set up PA system, one of the two CEOs announced that funding that had been sought had fallen through and the company could no longer sustain operating costs. Brown Industries, inventor of the carpet sample industry and economic juggernaut for more than 60 years, would permanently suspend operations.  I was suddenly unemployed.  All were stunned. A short Q&A session took place in which we were reassured this wasn't the fault of labor, this was a failure on the management level. Cold comfort, to say the least. My immediate coworkers and I returned to our desks and began filling boxes with photos and other personal effects. I was reminded of the collapse of Lehman Brothers in 2008 and seeing fo