Taking an Interest in Compound Interest
Compound interest is a double-edged sword. Albert Einstein reportedly called it the 8th wonder of the world, saying, "He who understands it, earns it; he who doesn't pays it." Einstein knew that compound interest is a force to be reckoned with. Today, financial planner and teacher Rob West explains how you can either make it work for you or let it work against you. Then it's your calls at 800-525-7000. A recent financial literacy survey found that individuals who fail to grasp the concept of interest that compounds have higher transaction fees, run up more debt, and pay higher interest rates on credit cards and other loans. Simple interest is what you pay on the original amount you borrowed or what you have in the bank only. Simple interest applies a fixed rate, meaning that the dollar amount you pay in interest remains the same for the life of the loan or account. Compound interest is calculated on your principal amount, plus your accumulated interest. So the amount you pay, or receive, in interest will change, it will grow over time. Compound interest works for you if you're saving money, but against you if you're borrowing. To take advantage of compound interest, do not carry a balance on your credit card. Pay off any consumer loans as quickly as possible, making additional payments on the principal if you can. Here are some questions we answered from our callers on today's program: --I am going through a divorce and am having to give 40% of my house to my ex. I am thinking of allowing my son to rent the house from me. Another option is to sell the house and use the money to pay off debt. What is your advice? --Would it be smart to sell stocks and pay off the remainder of our mortgage? --I am a beginner at buying stocks. Where do I start? --I had a life insurance policy with my job. I have been encouraged to obtain life insurance outside of my job also. I have a student going into high school. Where should I start? Ask your questions at (800) 525-7000 or email them at [email protected]. Visit our website at moneywise.org where you can connect with a MoneyWise Coach, purchase books, and even download free, helpful resources. Like and Follow us on Facebook at MoneyWise Media for videos and the very latest discussion! Remember that it's your prayerful and financial support that keeps MoneyWise on the air. Help us continue this outreach by clicking the Donate tab at the top of the page.