Interest and You
When people hear the word “interest” it arouses many different thoughts and emotions. Some think of interest as strictly negative, while others view it as a positive thing. The reality is that interest is something that can be both positive and negative depending on the context. Interest can be used to benefit your financial situation, but it can also be a money trap over time if you fall into the seemingly never-ending cycle of paying accrued interest on your debt.
Positive Interest:
Compound interest is one of the biggest positive uses of interest in personal finance and it is the driving force to grow your money over time. Compound interest is interest calculated on the initial principal plus all the accumulated interest from previous periods on a deposit or loan.
Investing in factors that have compound interest can grow your income exponentially, but it is important to note that the power of time is how compound interest does its magic. The longer an amount has to build on compound interest will increase the amount of money you’ll have at the end of its time working.
Another important note to add when talking about investments is to do your research and consult with someone with professional experience on your options before investing in areas that have compound interest.
Negative Interest:
One of the biggest negative interest traps is credit card interest because credit cards have high-interest rates for balances not paid in full. To avoid this, make sure to pay off the entire amount due on the card at the end of the month, and be sure to only spend an amount that you can pay off entirely. Additionally, not all credit cards are created equal when it comes to interest rates, as some cards have higher interest rates than others so it’s important to check the rate before applying and ensure that there is no annual fee. Practicing using your credit card wisely helps to prevent overspending and the accumulation of interest on the amount owed. Building the habitat of responsible credit card usage early is a skill that is invaluable down the road.
Regardless of whether it is a credit card or loan, the long-term harm of interest to your financial situation can be further increased the longer you let interest accrue, because the more time there is for the interest to build, the more of an interest payment you’ll have. You could find yourself in a situation where you end up paying only the interest amount off at the end of the month and not the principle, which will trap you in the cycle of credit card debt. Remember, being diligent in your payments and not borrowing more than you need is critical in maintaining a healthy financial situation.
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