What Compound Interest Can Teach You About Your Financial Habits

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                          Image Credit: Unsplash: Blake Wicz

Our financial habits can determine our relationship with money, but our relationship with money also determines our financial habits. When we spend hard earned cash,whether for groceries, shopping, or necessities…the only thing we are out of is the exact dollar amount of the goods we bought. But, what if the purchases that we make are being put on financial instruments like credit cards…well, that’s  a whole different ball game. 

Compound interest is defined as the interest that’s paid on top of interest. It’s like loaning a friend ten dollars with the promise of paying you back ten dollars plus an extra five cents at the end of the work week. For every dollar that you loaned him or her you got back a half a cent for your troubles for each passing day. Not too bad, right? 

Now let’s say that you put your bills on your credit card each month…because who doesn’t like to use those rewards points. If you have a standard annual percentage rate of 22% and your water and gas bills come out to $250 combined, then it may seem like you got a bargain deal with the 1% cash-back rewards.  

Eventually, next month is going to roll around and if you haven’t gotten that $250 paid off then you’re looking at paying it off in installments. So at the very minimum a $25 dollar monthly payment on your bill amount is going to cost you $29 dollars in interest over a year’s time. And for every bill or splurge that you add to the balance is going to increase the interest owed each month. 

woman in red shirt sitting at the table
Photo by Edmond Dantès on Pexels.com

So if you’re after instant gratification then it’s best to think wisely about your next purchase. Sometimes free money isn’t free after all and what looks good on the surface isn’t always what’s good for your wallet. Credit cards are designed to be easy and convenient but for a reason. But, if you’re not careful then you could walk yourself right into the interest trap and a year full of unnecessary debt

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