Earning Compounding Interest
Wise Money Management

One factor that can either help us or hurt us is whether we are paying or earning compounding interest. If we are earning compounding interest then we have freedom and are on the road to financial security. On the other hand when we are paying interest we can get on a treadmill that is difficult to get away from.

Let’s take a car loan as an example.

According to Edmunds.com the average car loan in 2003 was for $23,800. It is likely more today but we’ll just stick with this amount. Currently the 5-year automobile loans are at about 6.61%. This would account for a monthly payment of $467 per month and a total of $28,020 that you would actually pay for a $23,800 car.

The difference is startling if you would take that same $467 per month and invest it. In a money market account gaining 3.0% the value of that $467 per month would grow to $30,190. In a bond mutual fund earning 5.5% the value would climb to $32,167 and finally in a stock fund earning 9.0% you would have accumulated $35,223.

I know we all need a new vehicle from time to time but let’s try to keep interest swinging in our direction.

This same principle applies to any loan and gets worse with double-digit credit card interest rates.

If you start looking at the interest paid on a home mortgage it can turn your stomach. Although the vast majority of folks who purchase a home get a mortgage loan it is wise to minimize the amount as much as you can.

A life with no payments, earning compounding interest is freedom and a life living against interest is running in the wrong direction.

We all need a home to live in and a car to get us back and forth to work but try to minimize how far you are on the wrong side of compounding interest.


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