Chances are that over the years you’ve experienced or have heard at least one person talk about interest and interest rates. Whether it’s opening a bank account, taking out a loan, or saving for your future, interest will most likely affect your finances at some point. But wait, isn’t interest super complicated? Let’s walk through what interest means and how it can influence your life.
Interest can be confusing because it can be both earned and paid. In its most basic definition, interest is money paid or earned at a particular rate for money lent or saved. Think about it this way:
- If you put your money in a savings account, you are “loaning” your money to the bank. The bank will pay you a small fee for depositing money in their account or rather because you are “lending” the bank money.
- If you take out a loan to purchase a car, you will owe a fee to the bank for the money they lent you.
In both of these scenarios, you can be affected by simple and compound interest. Simple interest is a set rate based on the amount of money you borrow or save. *Think of simple interest as the amount of money you have to pay for the ability to borrow. Compound interest is based on the amount of money borrowed/saved plus the interest accrued from the previous year. Compound interest is ultimately what allows your “savings” to grow over time.
Interest is nothing to be afraid of but it is important to keep up to date with any credit cards or loans payments you may have. Aside from incurring late fees for non-payments, the longer you go without paying off your debt, the more interest you will have to pay. If you don’t stay up to date with your payments, you’ll have to pay back more than you initially anticipated. Try setting reminders on your calendar to ensure you are paying back a minimum amount each month to avoid additional interest accrual.
While interest can increase your monthly bills, it can be extremely beneficial to achieving your financial goals as well. When it comes to your savings, the earlier you start saving the more time you will have for interest to accrue in your account. Who doesn’t want more money, right? In simple terms, if you start saving even a little bit each year, interest will grow overtime. If you are accumulating compound interest, your funds will increase exponentially year over year. Therefore, it is important to start saving as soon as you can. The additional funds you earn through interest can be used for re-investment, retirement, or some extra spending money on your next vacation!
Interest has the potential to hurt you if you don’t stay on top of your finances but it also has the potential to really help you! Start taking steps towards tackling your debt to reduce the amount of interest you owe. Also, consider putting together a savings plan and start watching your money grow over time.
Whatever your situation may be, you are in control of your financial goals. Finances can be intimidating but you have to potential to prepare yourself for an amazing future. Start today!