Money Basics: Take an Interest in Interest

“Interest” can be defined as the cost we pay to borrow money. If you take out a loan, or use your credit card, you will be charged interest; this isn’t a punishment for borrowing, it is calculated compensation to the entity lending the money, based on the risk of your ability to pay the borrowed money back. This is why a good credit score is so important!  

Alternatively, if you put money into a savings account, it can be said the bank is borrowing from you, and you will EARN interest. If, say, you put $500 into savings, you may earn “compound interest.” Your starting amount, or principal, will not only earn interest, your interest will earn interest.

Find out how frequently your money will be compounded. Semiannually? Monthly? $500, earning compound interest for 1 year, compounded semiannually at 5%, will become $525.31. Monthly, at 5%, your $500 becomes $525.58.

Money that you borrow in any form, whether it be with your credit card, an auto or student loan, or home mortgage, earns interest. Find out your APR, or annual percentage rate, as well as any other fees that may apply. Consider interest an extra motivation to pay off your debts, as well as an extra motivation to save. It’s never too late to improve your finances!

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