how does compound interest work.
In: Economics
It’s important to realize that compounding interest can work against you just as easily…
All these examples are “You invest $100… you make $110” and so on.
Compounding interest is also what makes paying debt, specifically credit cards (18%), mortgages (~3-4%),and student loans) so difficult. Imagine you borrow $100, and pay back a share of it. But now, the $100 you borrowed is actually $118. And the next year it’s up to $139. If you didn’t pay back a substantial amount, the interest is going to be more than you pay back. And then next month/year, all you’re able to do is cover the interest.
A real life example – if you get a mortgage over 25 years, you’re paying MOSTLY interest for the first 10-12 years of your payments. Your principal (the amount you borrowed) is barely affected because the interest is so high (based on a 25 year payment plan). If you borrow, $500,000 – the compounding 3% interest will make that closer to $750,000 by the time you pay it off.
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