Face Your Money Challenges

the interest pay and the interest you earn money

The Interest You Pay and the Interest You Earn 
by Minya K. Irby | Living Well | Wednesday, July 31, 2013

There is a challenge that many of us face when it comes to understanding our money. This challenge could be the reason that most of us have more days in a month remaining than we have money at the end of a pay period. It could be the reason why whenever we feel like we’re finally almost out of debt, we somehow get sucked right back in. This challenge could also be the reason why saving money always seems so tough no matter how hard we try…that challenge is called: “interest,” and to overcome this challenge you have to acknowledge the difference between the interest you pay vs. the interest you earn.   

Imagine someone rolling a snowball down a hill. As the snowball rolls, it accumulates more snow, becomes more compact, and grows. Now, you can either be the person standing on top of the hill making the snowball roll down, or you can be the person at the bottom of the hill watching this giant snowball fall on top of you. The snowball represents interest and if you are on top of the hill making the snowball roll then you are making interest work for you. But, if you are the person standing at the bottom of the hill, then watch out because interest is working against you. So in the latter case, what should you do?  

Face the Challenge: Consider the Source of the Interest 

Sit down and look at everything you’re financing. This includes your mortgage, your car(s) note, credit card bills, late payment penalties, student loans, payday advance bills, rent-to-own bills, anything you’re paying for monthly, and then add those rates up. Until then, you will not understand how much you’re paying monthly or annually in interest on your money. Even if your credit rating is fairly decent, these numbers can still feel staggering, and if they do, this means you’re the person standing at the bottom of the hill. 

Start Reducing the Interest You Pay  

Create an immediate plan for overcoming the challenge. The more debt you have, the steeper the hill. So, start by eliminating a bill. This is how you begin to climb up the hill. For instance, if you have multiple car notes, eliminate one of them. If you pay your cable provider $200-300 a month, eliminate or find ways to reduce your cable bill. Do whatever is necessary to eliminate or reduce the amount of money you’re paying out each month. And remember, whatever you decide, don’t spend the extra money that you will now have left over. As you create your plan for reducing the interest you’re paying in order to overcome the challenge, you’ll start to climb up the hill more easily. You’ll realize that reaching the top means changing your financial picture for the better for the rest of your life. 

Begin to Increase the Interest You Earn

Continue your upward climb by taking that extra money you have and purchasing a Universal Life Insurance policy or an annuity. I recommend these two because they will provide you with some guarantees on your money. These policies often provide a ceiling and a floor in the event of market growth or failure. So consider putting that extra money into one of these two vehicles every month just as you would pay a bill. Depending on the interest rate, the length of time you contribute, and possibly the rate of inflation, you will (over time) amass amounts of money you didn’t believe you could. 

For example, let’s say you put an initial $300 into an investment vehicle, and invested $300 a month for five years at 6% interest. At the end of the five years, you will have saved approximately $21,000! A $21,000 lump sum you can roll into another investment vehicle and amass even more wealth. Now you’re the person standing on top of the hill, rolling up not one- but two big fat snowballs!  

Photo credit: Dreamstime 

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