On this week’s Mullooly Asset Management podcast Tom and Brendan continue talking about some of the fundamental building blocks of financial planning. Last week they discussed how financial planning really starts with paying yourself first. Having money saved can help your decision making process become a lot better. In that sense, what you do with your savings is important as well. Compound interest is a topic you will encounter whether you are investing money or spending it. When you are investing or saving money compound interest can be your best friend, but when you are spending money compound interest can really hurt you.
Tom and Brendan give examples of how compound interest can hurt you financially. Tom talks about bigger purchases like financing a family vacation and leasing a car. Both of these are costly and both of them involve compound interest. If you use a typical credit card to finance a $5,000 trip, you will likely end up paying about $7100 for it over six years. The cost of compound interest can really add up and mess with any financial planning you have done. It is difficult to save when compound interest is eating away all of your money.
As bad as compound interest can be when you are spending, it can be awesome when you are investing or saving money. If you invest your money and earn 5% on it each year, you will quickly accrue a nice return if the interest is compound. Compound interest includes all of the earnings from each year, on top of the base investment. Compound interest is preferable over simple interest for this reason.
Knowing what compound interest is capable of doing depending on the situation is critical to financial planning. There are many things to consider when saving, spending, and investing. You can hear some examples in this week’s podcast!
Mullooly Asset Management strongly urges our listeners and readers talk with their personal investment adviser before making any choice to buy or sell any investments. None of the securities mentioned in this podcast or blog post are considered investment advice. If you do not have an investment adviser please do not hesitate to contact Mullooly Asset Management through phone call or email.