Learn about the banking process, how and why you pay for it each and every time you buy anything. Also, what you can do to save this cost. It is almost 30 cents of every dollar!
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Compounding Interest and Profits
Understanding the role of interest, as used by banks and financial institutions, is essential to understanding the problems many Americans face. Often unseen, the power of interest over people’s lives is enormous. A closer look at interest and its implications will help illustrate the current situation.
A Look at Financial Planning
Most financial planners tout the virtues of compounding interest. For those who are not familiar with this concept, the following offers a practical analysis.
Compounding interest is a concept that is in line with Fundamental #6. If you recall, Fundamental #6 states that money makes more money faster than people make money. Very few people in the financial industry would argue this fact. Most of them would recite the virtues of compounding interest as support. The point is often made with an illustration and a calculator.
The planner would say, “If you took three dollars a day, and placed into an account earning 10% per year, you would haven over $72,000 in 20 years, but over $200,000 in 30 years and over $1.5 million dollars in 50 years. The reason is that if you don’t touch the money in the account, the interest compounds on the total.”
“So while you earn only 10 cents on the first dollar, in the first year, the next year you are earning 10% on $1.10 and the next year on $1.21 ($1.10 plus 10% or $.11). On and on it goes so by the time you have accumulated a lot of dollars in the account over decades, the interest on the principal is substantial. If you allow the account to grow for 20 or 30 years, the interest payments will allow you to retire comfortably.”
Seems like a good idea. Or is it?