Effects of Compound Interest (Tip #2)

This article assumes you have already read the advice in article a1.  If not, please click here to read... article a1

Now, some more points to drive home...

Spending.  To put $100 worth of merchandise on a credit card at the moment, you have to realize that this means your balance will be $100 greater every month until the point where you are debt free.  The following chart illustrates the effect this has in a monthly interest situation.  Compound interest is the effect of interest on interest. 

%Rate Month# Interest Balance
18.5 0   $100.00
18.5 1 $1.54 $101.54
18.5 2 $1.57 $103.11
18.5 3 $1.59 $104.70
18.5 4 $1.61 $106.31
18.5 5 $1.64 $107.95
18.5 6 $1.66 $109.61
18.5 7 $1.69 $111.30
18.5 8 $1.72 $113.02
18.5 9 $1.74 $114.76
18.5 10 $1.77 $116.53
18.5 11 $1.80 $118.33
18.5 12 $1.82 $120.15
18.5 13 $1.85 $122.00
18.5 14 $1.88 $123.89
18.5 15 $1.91 $125.80
18.5 16 $1.94 $127.73
18.5 17 $1.97 $129.70
18.5 18 $2.00 $131.70
18.5 19 $2.03 $133.73
18.5 20 $2.06 $135.80
18.5 21 $2.09 $137.89
18.5 22 $2.13 $140.01
18.5 23 $2.16 $142.17
18.5 24 $2.19 $144.37
18.5 25 $2.23 $146.59
18.5 26 $2.26 $148.85
18.5 27 $2.29 $151.15
18.5 28 $2.33 $153.48
18.5 29 $2.37 $155.84
18.5 30 $2.40 $158.24
18.5 31 $2.44 $160.68
18.5 32 $2.48 $163.16
18.5 33 $2.52 $165.68
18.5 34 $2.55 $168.23
18.5 35 $2.59 $170.82
18.5 36 $2.63 $173.46
18.5 37 $2.67 $176.13
18.5 38 $2.72 $178.85
18.5 39 $2.76 $181.60
18.5 40 $2.80 $184.40
18.5 41 $2.84 $187.25
18.5 42 $2.89 $190.13
18.5 43 $2.93 $193.07
18.5 44 $2.98 $196.04
18.5 45 $3.02 $199.06
18.5 46 $3.07 $202.13
18.5 47 $3.12 $205.25
18.5 48 $3.16 $208.41
18.5 49 $3.21 $211.63
18.5 50 $3.26 $214.89
18.5 51 $3.31 $218.20
18.5 52 $3.36 $221.57
18.5 53 $3.42 $224.98
18.5 54 $3.47 $228.45
18.5 55 $3.52 $231.97
18.5 56 $3.58 $235.55
18.5 57 $3.63 $239.18
18.5 58 $3.69 $242.87
18.5 59 $3.74 $246.61
18.5 60 $3.80 $250.41

Click here to see the same chart at 24%
 

  


So, to start, I paid $100 for a pair of hockey gloves the other day.  To the left shows the affects of having that extra $100 on my credit card for the next 5 years (60 months).  Now with compound interest, there is interest on top of the interest.  My credit card interest rate is 18.5%.

 

 

 

The first thing that I would like for you to notice, is that after 12 months, I've racked up $20.15 in interest.  How can that be, if the interest rate is 18.5% ? ?  Well, simply they divide the interest rate by 12 to give you your monthly interest, but they don't charge you at the end of the year, they charge you every month on the new balance, therefore you are paying interest on the interest.

 

 

 

 

 

 

Wow, this really adds up

 

 

 

 

 

Wow, on month 46 I've effectively bought the gloves twice, paying over double their purchase price.  So if, at the time of my purchase, I knew that I'd have credit card debt for the next 46 months, I should have considered the cost as $200, after all, if I hadn't purchased them, I'd have saved over $100 in interest, and the purchase price of $100.  I don't think I really needed $100 hockey gloves that bad, my $50 pair was fine, I'd just fell in love with the $100 pair.   I certainly didn't realize how much I was really paying for them if I used my credit card.  Spend wisely folks ! !  When you look at the price tag, double it in your mind, and you will spend more wisely!

 

 

After 5 years, 60 months, I've paid $150.41 in interest on a $100 pair of hockey gloves.  I think I'm putting a hold on my credit card usage.  I'm only purchasing essentials until I am out of credit card debt.



Comments most welcome  bigguy@fundiscoveries.com.

 

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