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2006-10-15 02:41:41
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Article by Mika Hamilton |
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Compound is the reason why credit card debt is so difficult to climb out of. Compound interest, when used for 'good', can help you save more efficiently and increase your wealth substantially. Compound interest and returns can be complicated. In this article you will find definitions followed by examples to help you better understand the nature of compound interest.
Compound interest is interest that is paid not only on the initial loan balance but also on the interest that balance earns. The is a great deal if you are on the receiving end. However, if you are on the paying end it can place you deep in debt. For example, take $1000 compounded annually at %5 gives you $1050 dollars at the end of the first year.
Year two gives you $1102.50, and year three the money has grown to $1157. It is important to keep in mind that compound interest can also be paid more frequently. There are some money market accounts which have interest compounded daily.
If you start off with $1000 dollars in this type of an account in 25 years, there will be well over $3000. This is a great way to save for college for the kids. Start each account off with $3000 dollars and by the time the child is ready for school you have enough money for state tuition.
Even if you do not have a $1000 to spare, do you have a $100? There is no minimum deposit in a money market account – simply deposit what you can afford and let your money work for you. Spare change, garage sale profits, and soda can returns are all great ways to scrape together money to put into a money market account.
Believe it or not you can live without eating out every night, or those expensive shoes. Compound interest is a great way to profit without doing much work. It will not make you rich instantly but only time you do great a nice stable return.
If you are on the paying end of compound interest – you are probably in trouble. As each year passes, each credit card company you owe money to compounds the interest on your debt yearly. Look at the numbers above and imagine that money coming out of your bank account each year until your debt is paid off.
Compound interest is the reason that you should make every attempt to pay off your credit card debt each month. Before you apply for, and use any credit card make sure you have read the fine print. Be well educated about the fees associated with the card including term, interest, minimum paying, payment schedule, and any prepayment fees.
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