Personal Finance for Engineers and Scientists

Make compounding interest your friend and not enemy

Compound interest needs to be your friend and not your enemy. It is your friend when you save money in a 401k or Roth IRA as early as possible. For example $10,000 invested by age 24 at 8% interest compounded annually with become $217,250 by age 64. Instead of saving early, you decided to live it up. Buy a new car, DVD player, theater sound surround, etc. Then in your early 30s, you decide to really focus on retirement and save $10,000 by at age 34. Using the same assumptions above of 8% compound interest, when you reach 64, that $10,000 will grow to $100,630. Wow, a difference of $116,620! That is what compound interest can do for you!

Compound interest, of course, can be your enemy like for credit cards. Credit card companies love when you pay the minimum payment. That way they can earn 12%-20% interest on what you borrowed. If you pay off a large purchase by using the minimum payment, you will pay 2-4X more in interest than the original purchase. So, some friendly advice...pay off your balance every month. You will save a ton of money in the long run.

For more information, the following books are recommended: