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What is interest?

By September 12, 2021No Comments

Giving or receiving money isn’t ‘free’.

If you burrow money, you have to pay interest on the debt, it’s the price you pay for someone giving you money.

When you put money into the bank, the bank pays you for that service, in the form of interest.

Interest is usually paid as a percentage (%) of the amount giving/received.
Interest rates are usually calculated on a per year basis

For example:
If you burrowed $100 at a 5% interest rate, then the total interest will be $5 for the year (or if you divide by 12 Months, then 5/12 = $0.40 cents per month.

Calculating the actual interest is a lot more complicated than that (That example uses ‘simple interest’). Compounding interest is when interest is calculated at the end of every day, which would take up way too much blogging space to write up, but you can play around with compound interest hereat the moneysmart gov website. Try playing around with:

  • Initial Deposit
  • Regular deposit amount and frequency
  • Number of years
  • Interest rate

What happens when you increase the interest rate?
What happens when you deposit $1 with no contributions over 100 years?

If you want to read about my first interest payment, check out myzero to 100 post (Tip, it wasn’t a lot)

Interest can be scary. When it’s working against you (Debt) it can be really hard to get ahead of it and pay down the Principal off completed, however, when its’ working FOR you, well then it’s your best friend. I like to imagine every $1 is a little worker, working 24/7 to make a tiny bit of extra money. The more workers (money) the more they produce.

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