iQuanti: Why is it worth storing money in a high-yield savings account? Why does your credit card debt continue to grow month after month?
If you've ever asked these questions, you've encountered a real-life example of interest.
But as you can see, interest can work positively or negatively depending on the situation.
Watch Your Savings Grow
Interest can work in your favor by adding extra cash to the money in your savings account.
Depending on the type of savings account you've set up, this compound interest can give you small but important annual returns that will help you grow your wealth.
Savings accounts are dedicated to money you plan on using for future needs, so don't pass up an opportunity to grow money that you're not currently using.
Even short-term gains on interest can prove beneficial to your financial planning in the long run.
Benefit From Investments
Investment options function as a riskier but potentially faster way to use compound interest to your advantage.
While stocks themselves do not technically earn compound interest, if you reinvest the money you've earned through the growth of your investments, you will compound the gains of your stock ownership.
Keep in mind this strategy only works if you see growth from the stocks themselves.
A savings account works as a much more surefire way to earn steady interest, due to a stock's ability to rise and fall in value.
If the worst happens and the stock plummets, you could lose a significant portion of your investment!
Keep an Eye on Credit Card Balances
One of the more unfortunate occurrences of interest happens when you fail to pay off a credit card balance in time. If you continue to fall short on your payments, the debt you owe will grow over time.
What's more, some cards will use a compound interest model, so the amount you owe will combine with the principal amount, making your debt grow even faster over time.
You can avoid interest on credit card debt by paying off your full statement balance each billing cycle during your card's grace period.
It's also an option to choose a card that offers an introductory "grace period" on interest rates.
However, these 0% interest cards often have steeper rates after the grace period ends, so make sure to research the fine print before you apply.
Understand the Rates on Big Loans
Mortgages, student loans, and car loans are examples of how interest rates can affect long-term debt and savings.
Before you take out any loans of this size, make sure you understand how the interest is applied to your outstanding debt.
These types of calculations can make all the difference five or ten years into paying off a large loan.
Some mortgages, for example, will use a simple interest formula but depending on the kind of mortgage you take out, you may also encounter compounding interest.
Each situation will turn out differently, so always take the time to better understand how these debts will grow as you pay them off.
Interest Doesn't Have to Hurt Your Wallet
Getting a grip on interest will make a life-changing difference when it comes time to make your budget. Watching out for its negative effects and capitalizing on its upsides can make add stability and growth to your personal finances.
Understanding the benefits and downsides of interest will make you a smarter saver and a more efficient financial planner. So, get a handle on how interest works, and stop leaving money on the table today.