Interest is interesting

The interesting thing about interest, is that it acts as our frenemy (friend/enemy). It’s often a major player in wealth building, but also one of the driving forces behind the ‘paycheck-to-paycheck’ lifestyle. It can work for or against you. The choice is yours.

To kick things off, I thought I’d start with a chart I’m sure we’ve all seen before. It shows just how important investing while you’re young really is. It compares a 25 year old that invests for 11 years, to a 35 year old that invests for 26 years. The results are rather interesting (pun intended)….

Pretty crazy stuff, huh? The younger dude only invested for 11 years, but came out with a butt-load more money than the older dude. It just goes to show that interest can be your best friend, especially when you have time on your side, but as Newton’s 3rd Law of Motion says: “To every action there is an equal and opposite reaction”

This, my friends, means that interest can bend you over and….well we won’t go there. Unfortunately, a bunch of people (maybe you being one of them) don’t realize this. They see a $15/month credit card payment and think life is just peachy. News Flash: It’s not that simple.

The following table shows how long it takes to payoff a $10,000 credit card debt (13% interest rate), when only minimum monthly payments are made. Any guesses as to how long it will take to pay off this debt? Scroll down to find out…

That’s right. It takes 354 months to payoff this debt. That’s 29.5 years. Not only does it take you almost three decades to finally rid yourself of the credit card ball and chain, but the $10,000 you borrowed winds up costing you $21,267. I don’t know about you, but I can think of a lot of things I’d rather do with $11,267 I paid in interest charges.

Take that same $10,000 CC debt and, instead of making the minimum payment, let’s say you make a fixed $300/month payment every month. Wanna know how long it takes to payoff the CC? 42 months, or 3.5 years. That’s 26 years sooner than the other option. Not to mention it saves you nearly $9,000 in interest payments.

Making the minimum payments on your high interest debt (when you have the ability to pay more) is just about the stupidest thing you could do…. ever.

Did you at any point fall victim to “minimum payments” with your high interest debt? Did you delay saving for retirement because you thought “There’s always tomorrow”? What do you find interesting about interest?