Compound Interest-Friend or Foe?

Compound interest…

Two words that make me think about my maternal grandmother.

I know what you’re probably thinking why would something connected to money make her think about grandma?

Let me explain…

My grandmother was widowed when she was just 51 years old. She was a very independent lady, didn’t rely on her family, didn’t want to burden my parents so she’d adopted a mindset that made sure she was financially secure to the day she died (at 87). She had two ways of looking at money and debt.

First one was, make money work for you and save up for something you want and then buy it. Never buy it and pay for it later.

I hope you’re seeing where the compound interest factor plays into this.

When I was seven, my grandmother opened my very first savings account for me. She added, if I can remember correctly, ten pounds and taught me my first money lesson of life. That money left in the account would continue to grow and grow due to compound interest. Ten would become eleven, twelve etc. without me having to add any more of my own money. That was money working for me and not me working for money.

One other thing she always did when she knew she needed something like a new winter coat was think ahead. Throughout the summer she’d put part of her pay check aside ready to buy the coat when the temperature dipped. She knew that if she had to pay for a coat on credit, she’d not only pay its actual cost but she pay more because of the added interest just for the privilege of borrowing money (yes, compound interest again!) That’s money working against you and not for you.

There have been lots of articles lately on how much credit card debt people are carrying and just as many written about the possibility of interest rate increases. It’s actually what got me thinking about compound interest and my grandmother.

Compound interest can be your friend as in the case of having a savings account, adding to it and not touching the money. Or it can be your foe when you have credit card balance and the compound interest causes you to get deeper and deeper into debt until one day you realize you’ll be paying it off until even after you retire.

So think about if you want compound interest to be your friend or foe. Is now a good time to start paying more toward your credit card debt and once that’s done be like my grandma and make money finally work for you and not against you.

Hope you’ve enjoyed this post and my trip down compound interest memory lane, if so consider subscribing to Budget Smart Girl so you don’t miss more money and budget related goodies.

Happy saving.