The Dark Side of Compound Interest

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In a recent post I explained how compound interest is like a superhero that can take even a modest investment and turn it into a serious sum of money when given enough time.  The power of compound interest should never be underestimated and you should take advantage of it whenever you can.

But that’s not exactly the whole story.  You see, there is another side to compound interest.  A dark side.  A Joker to compound interest’s Batman.  A Scar to it’s Mufasa.  A Flintheart Glomgold  to it’s Scrooge McDuck.  A Saruman to it’s Gandalf.

You get the idea.

As long as you stay on compound interest’s good side, it will look after you and help you build wealth and increase your net worth.  But if you fall prey to the dark side of compounding interest you’ll find yourself trapped in a downward spiral of rising interest rates and minimum balances.

You see, just as compound interest can help your savings and investments grow exponentially…it can do the same thing for your debt.  Those innocent credit card purchases become a heavy burden and when you add the total interest payments you make to the original price of the item you will be shocked at what it truly cost.

You can see what I mean by using the Federal Reserve’s Credit Card Repayment Calculator.  Let’s say you go out and spend $3,000 on new furniture and you charge it on your credit card at an interest rate of 17%.  Plug those numbers into the repayment calculator and this is what you get…

As you can see, it would take you 23 years to pay off that original $3,000 purchase and you’d pay an absurd $5,609 in interest charges.  That means you paid $8,609 for only $3,000 worth of furniture.

And if you continue to charge more purchases your balance and total interest paid will skyrocket.  That’s why carrying a credit card balance is a no-win situation that should be avoided if you want to keep control of your finances.  Because once you get compound interest working against you, it’s like pailing water off the Titanic.

Used wisely, compound interest is a powerful ally in your quest to build wealth.  But it also has a dark side that will hold you down and keep you from reaching your goals.