The Wonders of Compound Interest

Albert Einstein called compound interest "the greatest invention of all time." It has even been referred to as the "Eighth Wonder of the World." The trick is to get this tremendous force working for you rather than against you.

Is compound interest gobbling up a significant chunk of your earnings? If you maintain an ongoing balance with a credit card company, compound interest is costing you much more than you probably realize.

Let's start with basic interest, which is a fee that you pay to a lender for the privilege of borrowing his money. This interest is attached to the original amount at an agreed upon rate. Compound interest is calculated on the balance owing plus any previous interest charges. So then you find yourself paying interest on the interest. This compounding effect continues until it virtually takes on a life of its own. Credit card lenders make a killing putting this principle to work for them. Allow me to illustrate.

Let's say you're carrying a balance of $1,000 on a credit card with a 15% APR. If you pay only the minimum each month, you could conceivably gnaw away at this debt for over 25 years and end up repaying a total of over $3,400! If, on the other hand, you could commit yourself to paying $100 per month, this debt would be wiped out in less than a single year and the interest would come to a much less offensive $75.

Now let's look at what would happen if you took $1,000 and put it to work for you instead of against you. Let's assume that you are able to keep your hands off this money and simply let it sit and earn 6% interest compounded annually. After 12 years, your money would have doubled without you adding one extra penny!

You can quickly figure out in your head how long it will take for a sum of money to double by applying the "Rule of 72." You simply take whatever interest rate you're earning (6% in this case) and divide it into 72. The result will be the number of years required to double your money. (72/6 = 12 in our example)

You can apply the rule backwards as well. Let's say you have a lump sum of $5,000 that you would like to grow into $10,000 in 8 years. You would need to find an investment that pays 9% compound interest. (72/8 = 9). If the best you can find is an 8% return on your money (hypothetically speaking,) then it would take you 9 years to double your money. Not bad for just letting it sit there!

Now let's assume that you want to help the growth rate along, so you add an extra hundred dollars to this account just once a year. At the end of the 12 years, you would now have $3,800. If you could discipline yourself enough to add $200 a year, then you would find yourself with almost $5600. Seeing your money grow like this might well entice you to invest more money each month and really reap the benefits of this wealth-generating principle. And there's more good news. These examples demonstrate what happens when your investment compounds annually. Some institutions are more generous, compounding your interest quarterly, monthly or even daily.

It's pretty clear which end of the compound interest principle you want to be on. The first step toward the winners' circle is to pay off your existing debts. Even if you're already having trouble making ends meet, a mere $1 addition to a minimum payment can significantly shorten the life of that loan. That's right, just one dollar. You won't miss it and it would be well worth it. Remember the compounding effect. And once you're out of debt, there's no minimum for earning compound interest. Any sum that you can set aside will do. You don't need to be Donald Trump or Bill Gates in order to benefit from compound interest. It can work wonders for us all.

About The Author

Rosella Aranda, international marketer, writer and business mentor, collaborates with a team of experienced professionals to help people achieve financial health and peace of mind. To learn how to reduce your debt, view: http://www.FreeFreedomSeminar.com. For further information on how you can become financially independent, please visit http://www.FinancialFreedomWorld.com or write to rosella_aranda@yahoo.com.

---

Secured Loans Tips

Here are some useful secured loans tips. Secured loans enable most homeowners to borrow capital against the value of their property. A secured loan is where the... Read More

Debunking the FAFSA Myth

With the plethora of big-business entities jockeying for the money of students on the path to becoming well-to-do responsible consumers with a house, car, and 1.5 children,... Read More

No Credit Check Payday Cash Advance Loan - Benefits to Using a Payday Loan

No Credit Check Payday Cash Advance Loan - Benefits to Using a Payday Loan Online if You Have Bad Credit HistoryAn online payday loan can help you... Read More

What is Credit?

Ever wondered what is credit? Credit is more than just a plastic card you use to buy things - it is your financial trustworthiness. Good credit means... Read More

Debt Consolidation ? Watch out for Payday Loans

Most any large city has a number of small shops offering payday loans. They're often found in strip centers; sometimes they double as pawn shops. They have... Read More

A Guide to Finding Fast Homeowner Loans

Sometimes finding fast homeowner loans can seem impossible? no matter what you do, it seems like traditional lenders such as banks and finance companies take way too... Read More

Fast Cash Now Easier Than Ever, but at a Price?

Because of the Internet, quick payday loans are faster than ever before. Quick payday loans will really get you out of a fix, because quick payday loans... Read More

No Income Verification Loans ? When Income Doesnt Show on Paychecks

Financial statements, salaries, income proof, documents, paycheck, W-2 forms, 1099's - there is an exhaustive list of some of the forms that you may require to provide... Read More

What are Home Improvement Loans?

Home improvement loans are loans specifically designed by loans companies to help you fund an essential home improvement projects.Home improvement loans provided by loans companies are secured... Read More

Car Loans After Bankruptcy - How Poor Credit or a Recent Bankruptcy Can Affect Your Loan Approval

If you have poor credit or a recent bankruptcy, you can still get approved for an auto loan through sub prime lenders. Sub prime lenders specialize in... Read More

Cash Loans for Unemployed ? for an Instantaneous Response to Needs of the Unemployed

Unemployment is generally supplemented with several other vices like poverty and indebtedness. As if these are not enough, several contingencies start making their demands, all at once.... Read More

Military Payday Loans! The Before Pay Check Financial Fiasco, is History Now

Working under the most prestigious service of the country ? military ? and still struggling with ends to meet! Are finances crumbling on you? And you thinking... Read More

Benefits of a Home Improvement Loan

Some of the many benefits of a Home Improvement Loan are outlined below. Home Improvement Loans are ideal if you need more space but cannot afford to... Read More

A Personal Loan And Your Rights

You can use a personal loan for many different things including, but not limited to, paying off bills, taking a vacation, buying a car and much more.... Read More

Unsecured Loans: The Lesser Known Sibling Of Secured Loans

What is man's greatest invention?Some of the latest gizmos would immediately crop up in our minds as the most probable of the answers. But do these gizmos... Read More

Cant Wait For Payday? Try Check Advance

Check advance can come in really handy when you're waiting for the regular pay check that never seems to come. Check advance stations exist in most major... Read More

Filling Out The Loan Application

1. Property information. The application begins with a section on the property. Questions as to the type of loan sought, the terms of the loan, location and... Read More

It Only Takes a Few Simple Steps To Avoid Student Loan Debt

Student loan debt is a problem that affects many former students. It is a long and difficult process to pay off a student loan. Undoubtedly, it is... Read More

Military Loans ? Serving Financial Need of Those who Serve the Country

Military loans are overcoming financial difficulties for army personnel who have served the country with a dedication which can't be put in words. Military loans are offered... Read More

Bad Credit Wedding Loans in Case You want to Race Towards the Altar with Bad Credit

So you are engaged. Congratulations. It was not easy. What? Getting engaged? No, finding the right person. But it is just the beginning. There is still a... Read More

Ways to Find a Cheap Loan

If you're in the process of trying to find a cheap loan, you might find it frustrating and wonder if you're ever going to find the loan... Read More

Alternative Venture Finance: Federal Grants and Loans

While most companies seeking venture capital initially think about angel investors and venture capitalists, a large alternative source of financing is federal grants and loans. The two... Read More

Loans - Good or Bad Debt?

When borrowing money it is usually because we lack the cash to make a large purchase, such as for a car, home or education. However, an important... Read More

Why Bank Overdrafts May Be a Bad Deal For You

Many banks actively encourage their clients with low balances to overdraw their accounts. That means, if the customer writes a check or uses her debit card and... Read More

Loan Officer Marketing - The Power of Positioning

How do you build a marketing strategy that can have real estate agents hunting for your services? Realtors® are bombarded everyday with a continuous stream of marketing... Read More

Debt Consolidation Tips

Here are some useful Debt Consolidation tips. Debt consolidation is a loan used to repay several other loans. Debt consolidation loan takes the group of debts that... Read More