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Compounding Interest: Friend or Foe?

Compounding Interest: Friend or Foe?

Albert Einstein once said that compounding interest is the 8th wonders of the world. He also said that it is the greatest mathematical discovery of all time. All of us can leverage on it, either becoming its friend or foe.

albert-einstein

Compounding interest is the interest earning upon interest, upon interest, upon interest…

As A Friend

Best way to leverage it is to make it our friend or ally. The only way to do that is thru long term investment. Keeping your money invested for a long period of time makes the power of compounding interest even more powerful. It is the actual money working for you in action. No matter how small your initial investment is, if you invest it for long term…it will grow bigger than what you can imagine.

Let’s say you have Php 1000 today and you invest it.

If you put it on a bank with 0.25% interest rate, it will be around Php 1077 in 30 years.

If you put it on a time deposit with 2 % interest rate, it will be around Php 1800 in 30 years.

If you put it on a mutual with around 15% annual growth, it will be around Php 66K in 30 years.

Can you imagine its power if you deposit higher amount and get higher interest rate?

money-working-for-you

As A Foe

Now let’s see compounding interest working against you in form of debt like bank loan, mortgages, credit card, etc. I believe most of these people have credit card debt as it is the most easily accessible. Easy transaction and cashless payment. Only to find out that it grows enormously every month.

It is so tempting that the credit card companies only allow us to pay minimum 2% of our debt every month. Unknowingly, this is compounding interest working for them and against you, the credit card holder.

A typical credit card company charge us 3.5% per month on our remaining balance. In a year, that’s around 40% interest they make from us. Imagine how many people have credit card debt and only paying minimum amount. Now you know why these companies are making a fortune out of poor and ignorant people like us.

I remember a friend of mine who incur credit card debt of Php 30K and only pays minimum payment every month. After few years, his debt grew in hundred of thousands.

debt-credit-card

Final Note

Make sure you use compounding interest on your side. Invest your money and let it work for you in years to come. Make it as your friend.

P.S. A year ago, I do not know anything about investment. Then I joined Truly Rich Club by Bo Sanchez. It was the best decision I ever made in my life. Brother Bo is a spiritual preacher and at the same time, financial literacy advocate whose purpose is to help people become rich in order to serve the LORD with the money that they have. He guided me along the way, explaining how I can manage my money and make it work hard for me. Now I’m investing in stocks and mutual funds and have a clear path for my future. Soon I’ll open UITF account as well. All are made possible by his guidance and teachings on every steps to become an investor. Being OFW isn’t forever, this is my EXIT PLAN. It’s amazing how his teachings change my life. I’m inviting you to join the club too, JOIN TRULY RICH CLUB. If you have any question, feel free to leave your comment below. CLICK HERE TO JOIN

About Richard Macalintal

Hi my name is Richard. I am a Registered Financial Services Consultant in Singapore. If you have any queries or you need help on your insurance policies and investment linked products, feel free to message me :-) We can have a cup of coffee while I do financial review and give advice with regards to your finances :-) Contact me thru email rlmacalintal(at)yahoo.com or SMS me +65 82235186. Disclosure: I am a Financial Consultant of AIA. The statements or opinions expressed on this site are my own and do not necessarily represent those of AIA.

One comment

  1. Great article! So we can say it really “pays” to be smart, eh? 😀

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