Articles > Compound Interest
Understanding interest that is compounded
annually and the truth about compound interest
by Glen Becker
Compound Interest has been called “the Eighth
Wonder of the World,” because it can cause a small
amount of money to fairly rapidly grow into a very large
amount of money.
Here is an example: suppose a person borrows $2000
at 18% per year, and makes no payments. If interest
is compounded annually, the debt will grow like this:
Of course you may consider this unrealistic. It is.
No real credit card compounds annually; they all compound
monthly. The same $2000 loan, compounded monthly at
an 18% annual rate for 40 years, will grow to over $2.5
million instead of the $1.5 million shown above. Getting
realistic costs you an extra million in interest costs.
But you may think that this is unrealistic because
no payments are made. But consider how many credit card
users make only the minimum payment each month and charge
that or more in new purchases. The net effect is that
the payment only pays for the new purchases, and the
old balance grows as if there were no payments. The
only reason that your credit card balance cannot grow
to $2.5 million is that the bank will hopefully never
let your credit limit get that high.
Of course, you can get around that problem by taking
out multiple credit cards. Many people do, and charge
all of them to their limits, making only the minimum
payment on each. The result is a monstrous debt that
seems too large to ever repay. Because the debt is so
large, their credit rating drops; they cannot take out
new loans at low rates. Existing rates may escalate,
especially if they get behind on their payments. We
have seen examples of people of modest incomes owing
$50,000 to $100,000 in credit card debt, at interest
rates between 18% and 24%, who have tried to find lower
rates and were unable to get them.
So, if interest is so important, why do we ignore it?
Because it is “little”. We care only about
the debt, we want to ignore the interest. The bank,
however, cares a LOT about the interest, and they care
that you don’t care.
What does God say about this? The basic idea is “growth
creates more growth.” God depends on this for
the Kingdom: Matt 13:31-32 is the parable of the mustard
seed. There is not nearly enough energy in the seed
to make a large plant. But there does not need to be.
It uses “profits” from its leaves to make
more leaves and grow to thousands of times its original
size. If God wants His Kingdom to grow that way, does
it not seem fitting for your finances to grow the same
How can you get this powerful force of compound interest
to work for you instead of against you? Begin to aggressively
pay off the highest rate credit card first. If you make
an “investment” by paying extra principal
on a debt that charges 18% to 24%, you get a guaranteed
return of 18% to 24%. That’s the best possible
return on any investment available today, and it is
completely without risk.
To prove that this applies to you, take the debt that
you owe with the highest interest rate and calculate
the amount of interest you will have to pay if you continue
to just make the minimum payments. The number will seem
astronomical, but God wants to show you how to put debt
bondage under your heel. Begin today.