Lost in much of the conversation about the issues that impede the world economy is the concept of personal financial responsibility. The sub-prime mortgage crisis in the United States, for example was blamed largely on banks giving loans to unqualified consumers. What about the responsibility of consumers themselves to not take out a loan they may have a hard time paying back?
It’s important that consumers take charge of their own financial well-being. A compound interest calculator is a great way for people to understand how money compounds and how loan interest can really grow over time.
A compound interest calculator allows you to take charge of your finances. If you are borrowing money, you have to understand exactly how much you are going to have to pay back. For investors, it is just as important to be able to work out what return you will get on your money.
You need to be aware of the difference between simple and compound interest. Simple interest accrues interest on the amount lent or invested (the principal) at an agreed rate. With compound interest, interest is added to the principal in each compounding period, and itself earns interest in the next period. Interest can be compounded on a daily, monthly, quarterly, or annual basis.
The total amount of money grows more quickly with compound than with simple interest. The type of interest is therefore an important factor to take into account when making financial decisions. Investors should take careful note of the interest rate offered, as well as whether it is compound or simple, and the basis of compounding. They can then use one of the many online compound interest calculators available to compare the different products on offer.
Checking the total amount payable becomes even more important when you are taking out a loan. This is particularly true if you are making an important purchasing decision, such as buying a house, which will involve a large amount of money over a long period of time. Both you and the lender need to be sure that you will be able to afford the payments, and this is why it is essential to work out the total amount you will have to pay. Remember that you will pay a greater amount if the loan is extended over a longer term.
Credit cards are another form of borrowing where you should be aware of exactly how much you are paying. If you do not pay the full amount owing each month, interest is added to the balance and compounded on a daily basis. Daily compound interest calculators are available to allow you to check the true cost of your finance, have a quick look at the Money Programme on the BBC for example – you can watch Iplayer abroad using this.
Whatever the nature of the financial decisions you are making, it pays to be well informed. This means knowing the type of interest you are receiving or paying, and understanding how this will affect the end result. Always make sure that you use a compound interest calculator to help you make informed decisions.