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

The World In Which We Live: Safety Is An Option Edition

In a world in which Fight Club , The X Files , and the complete works of Phillip K Dick have collided into one twisted reality we call normal (with a dash of Black Mirror and The Big Short for flavor), we now learn that software upgrades that could have prevented the crashes of two Boeing 737 Max passenger jets were available... at a price . "Want your passengers to live to fly another day? Sure, but it'll cost you." And I'm unsure who is more evil, the manufacturer for making safety features ON A FLYING MACHINE optional at additional cost or the airlines for declining to install the features. This is a stunning failure of human decency in the eyes of this writer. Perhaps I shouldn't be so surprised. This is business as usual in our extortionary economy. In the US, medical bills are the leading cause of bankruptcy , a real-world manifestation of the "your money or your life" ethos of the street thug in literature and film. The hand wringing over w...

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 o...

It's Been A Bad, Bad Week

I lost my Dad this week. At 82 years of age, he'd lived a long life pretty much on his own terms. Congestive Heart Failure kept him in and out of hospitals for the last six months, and in ICU for two weeks. It was in ICU where he realized the end was near. We had our most meaningful conversations there, in spite of his growing weakness. Lots of "Remember when" stories, a few "What if" stories, and sadly, very few words of final wishes. Fortunately, he'd mostly settled that with my stepmother. I and a few other family members were present at the moment of his passing. There is no greater closure than to be holding the hand of a loved one as the end comes, and I'm forever grateful to have been there when the end came for Dad. A few hectic days followed, mostly involving legal documents and such. Tonight, my wife, son, and I went to see a ballet and returned to find our cat of 17 years dead on his blanket. I'm one of those "pets are family to...

www.markholder.org

Search This Blog