This is a partial quote from Albert Einstein who said, “Compound interest is the eighth wonder of the world. He who understands it, wins it; whoever doesn’t, pays for it.
Kari Lorz, a certified financial education instructor and founder of Money for the Mamas, said that aphorism holds true today, but many Americans don’t know the full impact of how compound interest can help them achieve their financial goals.
Lorz uses the example of an individual with a credit card balance of $3,000. The interest rate is 16.6% and the minimum monthly payment is $60. If you only pay that minimum payment of $60, it would take you 84 months and $2,039 in interest, plus principal, to pay off the balance.
However, Lorz said that if you took $3,000 and invested it today, with no additional contributions, and earned an average rate of return of 7%, you would have $8,151 over the same period. of 84 months. If the money stays for another 20 years, you would have $32,923. Those who add $50 per month to the initial capital of $3,000 would have $81,064 over the same 20-year period.
“Once you figure out what you’re missing and your money is going to pay off high-interest debt, you’ll do anything to pay off that debt as quickly as possible,” Lorz said.