Household Tips Interest

Interest

"Interest, them that get's it, gets it. Them that don't, don't."

If you understand how interest works, you'll make it work for you. If you don't it will work against you, so read on.

Starting with a simple principal that you've probably heard before, compounding interest makes lots of money.

For example, let's say a 30 year old woman puts $100 into a savings account each month for 10 years. At the end of a year she'd have put in $1,200 and at the end of 10 years, she'd have invested $12,000. So she's got $12,000, right? No, we have to include interest. Here's a chart:

Year	Month	To savings	Total to savings	Interest (.25%)	In savings (.25%)	Interest (4%)	Savings (4%)
1	1	100	100	0.02	100.02	0.33	100.33
1	2	100	200	0.04	200.06	0.66	200.99
1	3	100	300	0.06	300.12	1	301.99
1	4	100	400	0.08	400.2	1.33	403.32
1	5	100	500	0.1	500.3	1.66	504.98
1	6	100	600	0.12	600.42	2	606.98
1	7	100	700	0.14	700.56	2.33	709.31
1	8	100	800	0.16	800.72	2.66	811.97
1	9	100	900	0.18	900.9	3	914.97
1	10	100	1000	0.2	1001.1	3.33	1018.3
1	11	100	1100	0.22	1101.32	3.67	1121.97
1	12	100	1200	0.25	1201.57	4	1225.97
2	12	100	2400	0.5	2406.14	8.02	2500.07
3	12	100	3600	0.75	3613.71	12.04	3822.41
4	12	100	4800	1	4824.28	16.08	5193.12
5	12	100	6000	1.25	6037.85	20.12	6612.31
6	12	100	7200	1.5	7254.42	24.18	8080.12
7	12	100	8400	1.75	8473.99	28.24	9596.64
8	12	100	9600	2	9696.56	32.32	11162.04
9	12	100	10800	2.25	10922.13	36.4	12776.4
10	12	100	12000	2.5	12150.7	40.5	14439.84

From this table you can see that interest adds up. And the higher the interest, the faster it adds up. If at the end of each year, the money is transfered to a higher interest certificate of deposit (CD) then even more would accrue.

Now, the opposite is also true. If you buy a $200 stereo for your car on a credit card or loan, you could end up paying twice as much for it, or even more.

Another place we pay way too much interest is in fees, for example bank fees. Say you have an average bank balance of $200, and the bank charges you $7.00 per month in maintenance fees. That's 3.5% per month, or 42% per year, or $84 dollars per year, for the privelage of letting THEM use YOUR money! You should at least get a fee free checking account.

Ok, so how do we stop paying interest and start collecting it? We have to pay off debt.

More finance tips

Permanent files What to store in your permanent file.
Safe Deposit Box What to store in, and how to get, a safe deposit box.
Filing Checklist How to develop a filing system, either to start a new one or improve your existing one.
Other Files What to else to keep in files.
Budget Keeping a budget.
Medical Records What to keep, and what to do with medical records.
Home Inventory Creating and maintaining a home inventory file.
Car Purchases The most efficient use of your money when purchasing a car.
Phone Book An organized personal phone book file system.
Keeping Records Where to keep records.
A home office Setting up a home office.
Home Office Running a business from home.
Banking Banking, savings, checking, and other bank accounts.
Balance the checkbook How to balance a checkbook.
Interest What interest can do for you or to you.
Bad checks How much a bounced check really costs.
Tax refund What to do about tax refunds, how to calculate what to have taken out for taxes during the year.
Pay off debt How to get out of and stay out of debt.
Cutting Expenses Ideas for reducing expenses as much as possible.
Investing Making wise investments.
Credit Cards Making wise use of credit cards.
Debit Cards How to use debit cards.
Finances and records Getting started with your finances and records.

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