You know the line, only $99.00 per month. But did you know that the monthly payment plan could cost you more money in the long run? This is a topic from the personal economics portion of my program.
The Rule of 72
In finance, the rule of 72, is a method for estimating an investment’s doubling time. 72 is divided by
the interest percentage per period to obtain the approximate number of periods, usually years, required
for doubling. This example uses a very basic calculation but the math works no matter what the dollar
This same rule tells you much you will pay in interest when you borrow money. If you
borrow $100 and pay it back $4 per month for 10 years then you will have paid back $201. The point is, use cash whenever possible but if you must use credit- you want the lowest interest rate and the shortest term, if the extra $10.00 month is an issue, than you can’t afford to use credit.
If you happen to be the lender, you want to gain higher interest over the longest term.
A real life example would be a used car, say the car is $3800.00 and you put down $800.00, you will finance 3000.00 for 3 years at 17% interest. The total cost of the car will be $3,852.00 you paid an extra $852.00 for the car. I used small numbers here but the math works no matter how big the amount.
Use the calculator at Bankrate.com to review some other possible costs.
The Magic Of Interest
Interest is the fee that the bank pays you while they hold your money. It is also the fee you pay when
you borrow money. When you put your money in the bank they don’t put it in an envelope with your
name on it. They take it and put it to use, they invest in stocks, bonds, and insurance. They make loans
and charge the borrower interest. Interest by itself is an amazing thing. Interest grows your money.
Here is how it works If you put $100 in the bank and left it there for 10 years while the bank pays you
7% interest every month then your money would grow like this.
Your one time deposit of $100.00 with an interest rate of 7.00% compounded Monthly
Final Savings Balance: $200.97