What your Interest Rates really mean

What your Interest Rates really mean

Have you every really thought about interest rates? You might ask yourself, “why bother?” However, if you take the time to think about interest rates, you might just see how small difference in rates can affect you.

Interest Rates are Compound

The first thing to understand is that interest rates are compounded. This means that you pay interest ON THE INTEREST YOU OWE FROM THE MONTH BEFORE. A 2% interest rate per month for one year is not 24%, it’s really 26.82% This is a little trick that people try to hide from you in order to make you feel like your saving more money than you really are.

Let’s Think It Through

This is a very common question many people are asked when it comes to compound interest.

“would you rather have 1 million dollars, or 10,000 dollars in a savings account earning 20% per year in compound interest?”
Well, let’s see how that $10,000 would grow…

After 10 years: $61,917
20 years: $383,375
30 years: $2,373,763
40 years: $91,004,381
50 years: $563,475,143

WOW WOW WOW
Hold it! So after fifty years, you’d have over $500 million dollars?!

OK, first let’s be a little more critical about this…

We must take inflation into account – if we say inflation is 5%, then after 50 years we would actually have $10,732,859. So obviously is compound interest is working for you it’s a great deal!

The Big Picture

Compound interest is exactly how bank make their money from you. Be very, very afraid of compound interest. Or, of course, you could start saving, and be very glad of it…

Of Course, we all need cash here and then. Obviously I would hope that you pay off your loan IMMEDIATELY! If you have been thinking about a loan, click here
It adds up, please beware…

Let’s work through an example on a more real kind of scale. Let’s say you have an average unpaid balance of $2,000 on a card at 15% APR.

You will owe $300 in interest within the 1st year you borrow. However, this amount is then added onto the balance, and interest is charged on that. The second year, you’d owe another $345, for a total of $2645. If this vicious cycle does not stop, do you understand the consequences? You could end up owning tens of thousands of dollars if you don’t pay off your debt!

SO PLEASE PAY OFF YOUR DEBT!!!

After just five years at 15%, you’d owe double what you borrowed. And after 10 years, you’d owe four times what you borrowed! Bet you weren’t expecting that. If you never stop this cycle, you will be trapped forever. You don’t want to be trapped owing people thousands of dollars, and not being able to pay them back. YOU DON’T! I REPEAT…YOU DON”T!

“Don’t worry it’s just a One Percent of Difference…”
I don’t need to reapeat myself. It doesn’t matter if it’s a 1% differnce, or if it’s a 4% difference. If you don’t get out of your debt. Your going to be stuck even longer in debt, trying to get out.

Bottom Line: