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Understanding interest that is compounded annually and the truth about compound interest

Compound Interest
by Glen Becker

Compound Interest has been called “the Eighth Wonder of the World,” because it can cause a small amount of money to fairly rapidly grow into a very large amount of money.

Here is an example: suppose a person borrows $2000 at 18% per year, and makes no payments. If interest is compounded annually, the debt will grow like this:

Of course you may consider this unrealistic. It is. No real credit card compounds annually; they all compound monthly. The same $2000 loan, compounded monthly at an 18% annual rate for 40 years, will grow to over $2.5 million instead of the $1.5 million shown above. Getting realistic costs you an extra million in interest costs.

But you may think that this is unrealistic because no payments are made. But consider how many credit card users make only the minimum payment each month and charge that or more in new purchases. The net effect is that the payment only pays for the new purchases, and the old balance grows as if there were no payments. The only reason that your credit card balance cannot grow to $2.5 million is that the bank will hopefully never let your credit limit get that high.

Of course, you can get around that problem by taking out multiple credit cards. Many people do, and charge all of them to their limits, making only the minimum payment on each. The result is a monstrous debt that seems too large to ever repay. Because the debt is so large, their credit rating drops; they cannot take out new loans at low rates. Existing rates may escalate, especially if they get behind on their payments. We have seen examples of people of modest incomes owing $50,000 to $100,000 in credit card debt, at interest rates between 18% and 24%, who have tried to find lower rates and were unable to get them.

So, if interest is so important, why do we ignore it? Because it is “little”. We care only about the debt, we want to ignore the interest. The bank, however, cares a LOT about the interest, and they care that you don’t care.

What does God say about this? The basic idea is “growth creates more growth.” God depends on this for the Kingdom: Matt 13:31-32 is the parable of the mustard seed. There is not nearly enough energy in the seed to make a large plant. But there does not need to be. It uses “profits” from its leaves to make more leaves and grow to thousands of times its original size. If God wants His Kingdom to grow that way, does it not seem fitting for your finances to grow the same way?

How can you get this powerful force of compound interest to work for you instead of against you? Begin to aggressively pay off the highest rate credit card first. If you make an “investment” by paying extra principal on a debt that charges 18% to 24%, you get a guaranteed return of 18% to 24%. That’s the best possible return on any investment available today, and it is completely without risk.

To prove that this applies to you, take the debt that you owe with the highest interest rate and calculate the amount of interest you will have to pay if you continue to just make the minimum payments. The number will seem astronomical, but God wants to show you how to put debt bondage under your heel. Begin today.