Compound Interest, He Who Doesn’t Understand it Pays it.

Albert Einstein – “Compound interest is the eighth wonder of the world. He who understands it, earns it. he who doesn’t. pays it. Compound interest is the most powerful force in the universe.

The Federal Reserve released it’s 2nd quarter Household Debt and Credit Report last week. American consumers have accumulated consumer debts totaling $12.84 trillion… Considering there are roughly 300 million people in the United States, that’s about $42,800 owed by every single person in this country. If people truly understood how much all of that consumer debt costs them over a lifetime they might change their ways.

Did you know that if you have a balance of $5,000 on your credit card and pay only the minimum payment (usually 2% of the balance) it will take you over 30 years to pay off the balance, you’ll also pay over $14,000 on interest in the process. Consider walking into the furniture store and picking out a bedroom set for $5,000, but the sales associate told you that the price just went up to $19,000. Would you still buy it? If the answer’s no but you use you credit card and only make the minimum payments that’s exactly what you’ll pay.

Your auto loans are no different, they add thousands of dollars to the price of your car. Dealerships sell you a LOW monthly payments by stretching out the loan term often with a high interest rate! They focus solely on the monthly payment and rarely even mention the price of the car or the interest that you’ll be spending… When you use credit to buy things, the things you buy are more expensive. Imagine that you decide to buy a $25,000 vehicle and the sales person tells you that your price is $32,000. Would you buy it? If you take out an auto loan that’s exactly what you did.

When you consider purchasing anything with credit the first thing that you should do is open your Simple Loan Calculator App. Put in the price, rate and term of the loan and calculate the total cost. Use that number to make your decision rather than the price on the tag. Know the interest rates on your credit cards. Don’t forget interest rates are stated in annual terms so you get to pay that 19% each year that you carry a balance. Think long term, consider the total interest that you will pay over your lifetime and tell me why you may never be able to retire or live the life you want.

Convincing people that the monthly payment is what matters rather than the total purchase price if an item, including interest, is the smartest thing the global marketing machine has ever done.

For a good system to payoff all of your debt and start on the path to financial freedom read my post Eliminate Your Debt, Create a Snowball.

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