Dishonest money dwindles away, but he who gathers money little by little makes it grow.
The law of compound interest either works against you (debt) or for you (investment).
Debt Accumulation. 30-year old couple, John and Jane, took a loan of Rs.10,000 for celebrating their sons first birthday party.
They were told the interest is just Rs.3 for every 100 rupees. They thought it is such a small interest to be paid and so took the loan. In actual the interest rate is 3% per month and they have to pay back Rs.14258 at the end of the year with interest. So the compounded interest alone is a whopping 42.58%. If you are taking the loan and you are repaying it after 2 years the amount you have to repay is Rs.20328 [more than double of what you took as loan!]. This is how credit card company and many money lenders charge for lending.
Debt Accumulation : The parents of Tina wanted to buy some gold for her wedding. So they decided to take a loan of Rs.50000 from a neighbor which will be paid in 2 years time. The neighbor said the interest rate is only Rs.1268 per month for 2 years. So they took the loan thinking it is a small amount of interest to be paid. But in actual this is just the interest if added will come to Rs.30422 for 2 years and you also have to pay Rs.50000 the principal amount you took. In the end you will end up having to pay Rs.80422 at the end of 2 years!
Wealth Generation : You invest every month in the bank Rs.500 as recurring deposit with a 8.5% annual interest, and do it for 5 years. You will receive at the end of 5 years Rs.37425! It is a small amount you put in every month but it is a wiser way of saving.
There are no effective get-rich schemes.
- Millionaires typically buy used cars and don't live in fancier houses than they can afford.
- The lottery preys on the lower class and only raises money for the state.
- When you are faithful in managing the few resources God entrusted you with, then expect more.
Reflect back on
Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.
- How do you want to apply the law of compound interest in your life?