Compound Interest

Compound interest, the eighth wonder of the world

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”…Albert Einstein

A blessing to investors

If a 30-year-old has a good job and is investing every month for his retirement, compound interest can be a real blessing.  A small amount invested each month can become a huge amount 25 years later.

A curse to those with credit card debt

Credit card interest rates can vary.  19.9% is common.  Watch the short video below to see how someone with that interest rate was unable to get out of debt.  This was in spite of the fact that every month they were paying $100 more than they were borrowing.

 

How to get out of debt

Start with a spreadsheetspreadsheet for compound interest

Start by getting the facts down on a spreadsheet.  Start with month #1 in A2.  Insert this formula into A3: =A2+1.  Then hover over the lower right-hand corner and drag the formula down to a number of cells below.

Insert the amount owing into B2.  

In cell C2 add the interest in decimal form (0.199). Drag that amount into a number of cells in column C.

Insert this formula into D2: =(B2*(C2/12)).  Insert this formula into E2: =B2+D2.

At the end of each month you will take the total credit card purchases for the month and add a fixed amount.  The sum is how much you will pay down on the credit card that particular month.  Insert that fixed amount into F2.  

Insert this formula into G2: E2-F2.  Insert this formula into B3: =G2.

For each cell hover your cursor over the lower right-hand corner.  Drag the contents of each cell down a dozen or two lines.  

Now comes the hard part!

Are the amounts in column B increasing?  If so, you will have to make some hard decisions and look at all of your expenses that are not absolutely necessary.  Prioritize them and keep increasing the amount in column F.  Keep playing around until column B reaches zero at an acceptable point.  Live with your decisions.

Related pages

An articles entitled How to Get Out of Debt, Make a Plan says “The first thing to keep in mind is that debt is not erased overnight
–the process has more in common with a marathon than a sprint
.”  More