Compound Interest: Blessing and Curse

Like so many things that have to do with money, compound interest is both a blessing and a curse — depending entirely on which side of the yield you are on. If you are on the receiving end of the yield, compound interest is a great blessing and a great way to grow your wealth. Unfortunately, if you are on the paying end, you already know how devastating and expensive compound interest can be.

Simple v. Compound Interest

Simple interest basically means that interest is charged only on the principal of your investment or your loan. Compound interest, however, allows interest to be earned on the interest. The interest you have earned is added to the principal, and then you earn interest on the new total. This allows your money (or your debt) to grow faster. The thing that makes credit cards so devastating is that so many of them compound interest daily. That means that every day interest is charged on your balance, and added to the principal. The next day, the newer, larger amount racks up the interest charges.

You can see why it is so important to pay off debt as quickly as possible: You want to avoid all the interest charges. Compound interest over a period of years adds up to hundreds — and even thousands — of extra money you are paying for no tangible benefit. And, on the flipside, you can also see why it is a good idea to look for investments that compound the interest. There are CDs, savings accounts and other investments that pay interest earnings through compounding. These are  accounts you should be opening and putting your money in.

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