Did Albert Einstein declare compound interest to be ‘the most powerful force in the universe’? The website snopes.com which tries to verify urban legends rules it “dubious”. Nevertheless, I geek out a little on the idea.
Did Albert Einstein declare compound interest to be 'the most powerful force in the universe'? The website snopes.com which tries to verify urban legends rules it "dubious". Nevertheless, I geek out a little on the idea.
Simple Interest Bad-ish
Simple interest just acts like a fee assessed on your remaining loan amount as you pay it down each pay period, for example. This is why, when you are paying down a mortgage or credit card balance, it is always helpful to add even a few dollars more toward the principal to get it down as quickly as you can.
In this situation, interest will only be assessed on the remaining balance.
(You also want to make sure there is no "prepayment penalty" you would have to pay in the event you pay the whole thing off early–shocker–although if there is, you can decide to pay it anyway or to slow down your payment schedule to stretch it to the finish line. But what a better problem to have!)
Compound Interest Good
In contrast, compound interest on your savings, for example, is interest assessed on your new balance then added to your principal so the next pay period your balance is principal plus the interest added to it in the last pay period and so on.
You wouldn't want it assessed this way on a loan balance, but on your savings, this is how, if not touched, it can grow. This is what is meant by compounding and it can be good.
Credit Card Debt Bad
But compound interest assessed on credit card debt is bad. The debt is bad for everyone, but especially bad for us because we need to be judiciously using all of our resources to meet "our highest priorities."
And interest on credit card debt keeps us from saving or investing and is non-deductible on our taxes.
In a recent NMSS Presentation Dick Bell of Bell Financial said to think of it like this: "Not paying $500 a month in non-deductible credit card debt could be $500 more you add to your savings or retirement. "
He continued, saying "Your earning power is your greatest asset." But reminded us that a person with M.S may not be able to work a full day or even to work to full retirement age.
And while we may not be able to affect our income (in the short-term anyway), we can affect our spending. So the first thing to focus on is getting rid of credit card debt. That and starting an emergency fund.
If you have no extra money, could you return cans, for example, to just get $2 extra dollars? Then add $1 to your credit card bill and $1 to start your emergency fund.
Bell insists that "Success breeds success." Even baby steps count.
Finally, as we have seen, using a credit card for an emergency should only be considered as a last resort. And if you do use it, try to pay it off as soon as possible.