Compound Interest Does it really make a difference?

Pretend that I borrow $100 from you.

I’ll pay it back today. Or, I’ll pay you back tomorrow with interest. Kitchen A- you get paid back at 5% APR. Kitchen B- you get paid back at 10% APR Kitchen C- you get paid back at 15% APR Kitchen D- you get paid back at 20% APR What is APR? Annual Percentage Rate. Remember, the interest rate is figured on the unpaid balance. To speed things up, we’ll pretend that one year is the same as one day.

Compound interest means that the interest payments keep accumulating and you have to pay interest on the total current balance, not on just the amount you borrowed. The longer the loan, the less the monthly payment is, BUT the more it costs you. The higher the APR, the more it costs you.

Next day- I forgot. I’ll pay you tomorrow. What’s your new balance that I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ Don’t worry- I’ll really pay you back tomorrow. (Day/Year 1)

Next day- my dog ate the money. What’s the new balance I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ Don’t worry. I promise to pay you back tomorrow. (Day/Year 2)

Next day- someone robbed me on the way to school and took the money. What’s the new balance I owe you? – Kitchen A- $116.55( 5% interest) – Kitchen B- $136.72(19% interest) – Kitchen C- $161.46(15% interest) – Kitchen D- $191.98(20% interest) What do you notice about the difference in the amounts owned between each kitchen?  Don’t worry- I’ll really pay you back tomorrow. (Day/Year 3)

Next day- An alien came down and dematerialized my money. What’s the new balance that I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ I think the aliens are gone, so I’ll pay you back tomorrow. Really. (Day/Year 4)

Next day-I’m broke- sorry What’s the new balance that I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ Don’t worry- I’ll pay you back tomorrow. (Day/Year 5)

Next day-a giraffe stole my wallet. What’s the new balance that I owe you? – Kitchen A- $135.84( 5% interest) – Kitchen B- $186.93(10% interest) – Kitchen C- $260.68(15% interest) – Kitchen D- $368.57(20% interest) Don’t worry- I’ll pay you back tomorrow. (Day/Year 6)

Next day- Bigfoot took it. What’s the new balance that I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ Don’t worry- I’ll pay you back tomorrow. (Day/Year 7)

Next day- I thought it was a gift, and not something to be paid back. What’s the new balance that I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ Don’t worry- I’ll pay you back tomorrow. (Day/Year 8)

Next day- I can’t pay you at this stage of the moon. I have to wait. What’s the new balance that I owe you? – Kitchen A- $ – Kitchen B- $ – Kitchen C- $ – Kitchen D- $ Don’t worry- I’ll pay you back tomorrow. (Day/Year 9)

Next day- I only had euros on me, and couldn’t get it turned into dollars. What’s the new balance that I owe you? – Kitchen A- $166.62(5% interest) – Kitchen B- $283.65(10% interest) – Kitchen C- $493.76(15% interest) – Kitchen D- $879.42(20% interest) Don’t worry- I’ll pay you back tomorrow. (Day/Year 10)

After 15 days/years What’s the new balance that I owe you? – Kitchen A- $ ( 5% interest) – Kitchen B- $ (10% interest) – Kitchen C- $ (15% interest) – Kitchen D- $ (20% interest)

And after 20 days/years What’s the new balance that I owe you? – Kitchen A- $ ( 5% interest) – Kitchen B- $ (10% interest) – Kitchen C- $ (15% interest) – Kitchen D- $ (20% interest)

How much difference does the APR make? This shows the cost to borrow $100.

How much difference does time make when it’s 20% APR? This shows the cost to borrow $100.

Remember: The longer the length of the loan, the more it costs you. The higher the interest rate (APR), the more it costs you.

Another hazard- Payday loans Borrow $100 until your next payday, two weeks away. Pay back $120 on the due date. Is the interest 20%? No, that’s 20% interest for two weeks’ of time. The Annual Percentage Rate is 520%. If you do this every two weeks, then borrowing the $100 and paying it back with $120 would cost you $480 over the length of one year!

Plus, payday loans have many other hidden problems.

Most people have to borrow money. You can figure out the costs yourself. Go to What kinds of things do you want to buy?

Florence gets a new credit card with a $2000 limit. She has a great time, spending it all on clothing.

How long does it take to pay off her credit card balance? Paying $50.00 each month: 5 years to pay off at a cost of $1077 interest plus the $2000 balance. Paying off the minimum balance each month: 15 years to pay off at a cost of $2423 interest plus the $2000 balance. Her clothing really cost $4423. Will it be in style 15 years from now?

Do you want a new car?

Most of us cannot afford to pay cash for a large purchase, such as a car. Instead, we finance it. A bank or a finance company buys the car for us. We then pay them back a little every month until it is paid. The amount we borrow is called the principal. The cost to borrow this money is called the interest. The bank keeps your title on the car until it’s paid in full.

The salesperson writes up a deal. Often, the only amount you hear is what the monthly payment is. But do you need to know more than that? Let’s look at a pretend car you’re buying. You need to finance $15,000. The car dealership offers to finance it for you. How do you know if it is a good deal or not? Go to

Remember, the total paid is the cost of the car PLUS the cost of the interest. Does the APR (annual percentage rate) of the interest make a difference in what you pay? Does the length of the loan make a difference in what you pay? Think this out carefully. It’s YOUR money. The salesperson will not help you on this.

Cost of the car- money borrow- ed Monthly payment Length of loan in years APR (Annual Percent- age Rate) Total cost of interest $15,000$3804 years10%$ 3,261 $15,000$2786 years10%$ 5,008 15,000$3707 years24%$16,092

You might be thinking that you don’t have any debt. But your country does have debt. A lot of it! How does that affect you?

How much are the interest payments? The government borrows money, and it needs to be paid back with interest, just like anyone else. They pay out interest in Treasury bonds to individuals, as well as make payments to other governments who loan money to us. Proposed percent of budget towards interest payments: 6% Dollar amount paid in 2013: about $415 trillion- That is $415,000,000, That’s in one year.

The U.S. federal budget (2012) in numbers we can all understand: U.S. annual tax revenue: $2,340,000,000,000 Federal annual budget: $3,590,000,000,000 New annual debt : $1,250,000,000,000 National debt: $15,400,000,000,000 Year 2012's budget cut by Congress: $38,500,000,000 (from World Magazine, May 19, 2012, by Warren Cole Smith)

Now remove 8 zeros and pretend it's a household budget: Annual family income: $23,400 Money the family spends annually: $35,900 New debt added to credit cards: $12,500 Total balance on credit cards: $154,000 Total cuts to the family budget: $ 385

Eventually, someone needs to pay this debt. At the moment, those running the government are planning on leaving this bill for you, the future taxpayers, to pay it off. How do you feel about that? Is there anything you can do about this?

What is the current national debt? The Outstanding Public Debt as of Sept. 26, 2014 Is $17,756,925,793, The estimated population is 319, 092, 076 so each citizen's share is $55, Concerned? Then tell Congress and the White House! Pay attention to who is running for all government offices and vote carefully.