Also, Investor.gov has a FREE compound interest calculator for you to try out. Plugin the numbers based on your savings goals and experience the power of compounding. Notice the difference in the total contributions and future values. The disparity between the two gets larger each year you take advantage of this tool, too!
How do most people use the power of compounding?
Unfortunatley, there’s a downside to power of compounding, too. It works even harder against you when borrowing money.
Credit cards and certain types of loans accumulate interest on the outstanding balance. At the end of the billing cycle, you have the choice of paying the minimum or an amount above the required payment.
Paying the least amount due will only reduce the balance slightly. As a result, the power of compounding begins working against you!
But, anything you pay above the minimum goes directly to the principal. This causes the balance to fall more quickly and gives compounding interest less time to rake you over the coals. The result, a healthier personal financial statement and more money to put towards your goals!
Consider this example, let’s assume that we have 2 borrowers, Mary Minimum and Eric Extra. They both owe $1,000 on a loan that has an 8% interest rate. It also has a $150 minimum payment. Mary pays just the minimum and it looks like this:
While, Eric pays an extra $50 per pay period:
The difference in interest charges between the 2 borrowers is $156.68. Also notice that Mary Minimum pays her debt off with the 10th payment. While Eric Extra pays his off with the seventh. As you can see, paying a little bit extra on the principal balance each month saves you time and money. There is less time for the power of compounding to work against you!
Most American’s have debt with interest rates much higher than 8% and balances significantly greater than $1,000. If you have non-mortgage debt, focus on getting it paid off. Once it’s gone, be vigilant in making sure it doesn’t come back.
The best thing you can do is pay your revolving debts in full each month. Do not carry a balance. And do not let the power of compounding interest affect your financial wellbeing, either!
Now that you understand Einstein’s message, change your relationship with interest. You can stop the financial suffering it causes. Instead, use the power of compounding to your gain!
Isn’t Einstein a genius? I think so too!
One more thing. You will never be younger than you are right this very second. This makes it the perfect time for you to get started while time is still on your side. By using the power of compounding to your advantage today, you’ll reach your most important financial goals sooner!