If you invest your money in an interest-earning account, your money is actually working for you. Say you invest your money into a retirement account. The funds earn interest over time. Money in a bank earns interest because a bank is paying for the benefit of borrowing your money. Interest rates fluctuate, and you are more likely to get the best returns in mutual funds, though these are higher risk than the traditional bank account.
When you pay interest, you are losing money. You are paying for the privilege of borrowing money. While you may only get 2 percent interest on a bank account, credit cards typically charge you upwards of 24 percent or more! Talk about highway robbery.
Compound interest is earned on rolling balances, not the initial principle. This is great for investment and terrible for debt. As an example: If you invest $1000 at 10 percent interest and you don’t add any more money the entire year, you will have earned 10 percent on that $1,000 giving you $1100 at the end of the year. The next year, you’ll earn 10 percent interest on that $1100. It sounds small, but more money and more time make huge increases.
When you are paying off debt—this can work against you, especially if you make late payments.
Originally posted 2015-06-28 15:24:12. Republished by Blog Post Promoter