Good morning & happy Monday!
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
Albert Einstein
I start today’s memo with the same quote as I did last week, because today we discuss the other side of the compound interest coin … being in debt.
Just like interest makes interest for those who save … interest charges interest for those who borrow … and it can be very dangerous.
Let’s say I get a credit card offer for 0% for 12 months. That seems like a nice offer so I accept it and charge $10,000 on the credit card over the next 12 months, all interest free.
At the conclusion of the 12 months the credit card company starts charging an interest rate of 18% on that $10,000 that I owe. I am a concerned by this and I cut up the credit card so I don’t spend any more on that card. When the statement comes in the mail it says my minimum payment is $100, but I want to be done with this credit card so I pay $150/month for the next 12 months.
At the end of that 2nd year (1st year interest free, 2nd year $10,000 balanced charged @ 18%) guess how much I owe? $10,000. Yep, $150 per month only covered the interest charged.
So, now I’m quite annoyed and I start paying $200/month because I want to start making progress on paying off this obnoxious credit card.
At that rate it will take me 93 months (7 years & 9 months) to payoff that credit card! Since I already have had the card for 2 years it will take a total of 9 years & 9 months to payoff a $10,000 credit card balance … and it will take $20,410.27 in payments to make that happen ($10,410.27 in interest).
Wow! That 0% introductory rate does not seem so attractive now. Not only did my $10,000 in purchases cost me over $20,000 but it also cost me nearly 10 years of my life!
Bottom line … interest can be a tremendous friend or a relentless enemy. Every day we all make choices that determine which side of the interest coin we will play … and the decisions will have far reaching consequences.
It is an honor to help navigate these financial waters with you to help interest be a friend ????
Make it a great week ahead!