This is a partial quote from Albert Einstein who famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Kari Lorz, certified financial education instructor, and founder at Money for the Mamas, said this aphorism holds true today, but many Americans don’t know the full impact of how compound interest can help them reach 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 $60 minimum payment, it would take you 84 months and $2,039 in interest, in addition to the principal, to pay off the balance.
However, Lorz said if you took $3,000 and invested it today, with no additional contributions, and got an average rate of return of 7%, you’d have $8,151 in the same 84-month period. If the money sits for an additional 20 years, you’d have $32,923. Those who add $50 a month to the original $3,000 principal would have $81,064 in the same 20-year period.
“Once you understand what you are missing out on and that your money is following down the drain by paying high-interest debt, you will do everything to pay that debt off as quickly as possible,” said Lorz.
