Interest, and why time is doing the work Interest, and why time is doing the work Unit 3 — Credit and debt Unit 3 — Credit and debt Interest, and why time is doing the work Interest, and why time is doing the work The same force that makes debt expensive makes saving powerful. It is the same math, pointed in two directions. The same force that makes debt expensive makes saving powerful. It is the same math, pointed in two directions. Lesson 6 of 8 — about 15 minutes — CareerStart.ai Financial Literacy Lesson 6 of 8 — about 15 minutes — CareerStart.ai Financial Literacy What you will be able to do What you will be able to do What you will be able to do What you will be able to do By the end of this lesson By the end of this lesson 1 Explain compound interest in plain terms Explain compound interest in plain terms 2 Compare carrying a balance to saving early Compare carrying a balance to saving early 3 Estimate growth over time Estimate growth over time Interest on interest Interest on interest Unit 3 — Credit and debt Unit 3 — Credit and debt Interest on interest Interest on interest Simple interest is charged on what you originally borrowed. Compound interest is charged on what you borrowed plus the interest already added. That difference sounds small in month one and becomes the whole story by year ten. Simple interest is charged on what you originally borrowed. Compound interest is charged on what you borrowed plus the interest already added. That difference sounds small in month one and becomes the whole story by year ten. On a credit card at around 24% APR, a $1,000 balance paid at the minimum can take years and cost hundreds in interest. The card is not unusual — that is how minimum payments are designed to work. On a credit card at around 24% APR, a $1,000 balance paid at the minimum can take years and cost hundreds in interest. The card is not unusual — that is how minimum payments are designed to work. Pointed the other way, it works for you Pointed the other way, it works for you Unit 3 — Credit and debt Unit 3 — Credit and debt Pointed the other way, it works for you Pointed the other way, it works for you The exact same mechanism applies to money you save and invest. Someone who starts putting away a modest amount at 18 can end up ahead of someone saving much more starting at 30, purely because the earlier money had more time to compound. The exact same mechanism applies to money you save and invest. Someone who starts putting away a modest amount at 18 can end up ahead of someone saving much more starting at 30, purely because the earlier money had more time to compound. This is the argument for capturing an employer 401(k) match as soon as you are eligible. It is not about the amount you can spare at nineteen — it is about how many years that money gets to work. This is the argument for capturing an employer 401(k) match as soon as you are eligible. It is not about the amount you can spare at nineteen — it is about how many years that money gets to work. Key term: APR Key term: APR Key term Key term APR APR Annual Percentage Rate — the yearly cost of borrowing, including interest and certain fees. The higher the APR, the faster a carried balance grows. Annual Percentage Rate — the yearly cost of borrowing, including interest and certain fees. The higher the APR, the faster a carried balance grows. What time does to money What time does to money Activity Activity What time does to money What time does to money $50 a month at 7% average annual growth, starting at 18. $50 a month at 7% average annual growth, starting at 18. After 10 yrs $8,654 After 20 yrs $26,046 After 30 yrs $60,998 After 47 yrs $219,321 You would put in about $28,200 and finish near $219,321. Roughly $191,121 of that was never your money — it is growth. You would put in about $28,200 and finish near $219,321. Roughly $191,121 of that was never your money — it is growth. Change the amount and the age → Why it matters at work Why it matters at work Why it matters at work Why it matters at work Rule of thumb: at 7% annual growth, money roughly doubles every ten years. That is why a decade of delay is expensive even when the monthly amount is small. Rule of thumb: at 7% annual growth, money roughly doubles every ten years. That is why a decade of delay is expensive even when the monthly amount is small. ← Previous Mark complete Next: Knowledge check — Unit 3 →
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